Date: October 11, 2024
Broker Name: Maybank Investment Bank Berhad

Overview of Public Bank

Public Bank is a leading retail bank in Malaysia with a dominant market share in residential property, commercial property, and auto financing segments. As of the report’s date, Public Bank’s share price stands at MYR 4.57, with a 12-month target price of MYR 5.40, indicating an expected upside of 18%.

Acquisition of 44.15% Stake in LPI Capital

Public Bank has proposed to acquire a 44.15% stake in LPI Capital (LPI) for a total cash consideration of MYR 1.72 billion or MYR 9.80 per share. This represents a 25% discount to LPI’s current share price of MYR 13.00. The acquisition is expected to bring a marginal enhancement to Public Bank’s earnings and Return on Equity (ROE).

• Breakdown of Stake:
  The acquisition includes 1.41% from the Estate of the Late Tan Sri Dato Sri Dr Teh Hong Piow and 42.74% from Consolidated Teh Holdings Sdn Bhd.

• Mandatory General Offer (MGO):
  Public Bank will also make an MGO for the remaining shares at MYR 9.80 per share. However, due to the significant discount, little acceptance is expected. Public Bank intends to maintain LPI’s listing status.

Impact on Public Bank’s Financials

• Capital Ratios:
  After the acquisition, Public Bank’s Common Equity Tier 1 (CET1) ratio at the commercial bank level is expected to drop from 13.0% to 12.4%, while the group level CET1 ratio will decline from 14.5% to 14.3%. These levels are still considered comfortable.

• Earnings Enhancement:
  The acquisition is expected to result in a 1.4% enhancement to Public Bank’s FY25 earnings, with a slight improvement in ROE from 12.7% to 12.9%.

• Consolidation of LPI’s Earnings:
  With the acquisition of the 44.15% stake, Public Bank will consolidate LPI’s earnings rather than equity account for them.

Synergies and Strategic Benefits

• Cross-Selling Opportunities:
  Public Bank has had a long-standing relationship with LPI, and this acquisition is expected to enhance cross-selling opportunities, particularly in the mortgage and auto financing segments, where Public Bank has significant strength. LPI derives about 20-23% of its business from Public Bank.

• Enhancement to Non-Interest Income:
  LPI’s contribution is expected to bolster Public Bank’s fee income ratio, which stood at 14.9% in FY23. This acquisition will also improve the bank’s non-interest income (NOII) ratio, which was lower than its peers in FY23 due to weaker investment and forex income.

• Integration of Distribution Channels:
  LPI’s 21 branches in Malaysia and 1 in Singapore can be integrated into Public Bank’s network, accelerating the bank’s push towards a Universal Banking Model without significant additional investment.

Paring of Stakes

• Consolidated Teh Holdings:
  Consolidated Teh Holdings and the estate of the Late Tan Sri Teh hold a combined 23.4% stake in Public Bank. This stake is to be gradually reduced to 10% over the next five years through a restricted offer for sale to employees, directors, and investors.

• Sale of LPI’s 1.1% Stake in Public Bank:
  LPI currently holds a 1.1% stake in Public Bank, valued at MYR 972 million (MYR 2.44 per LPI share). This shareholding is expected to be disposed of over the next 6-12 months, and there is a possibility of a special dividend being declared from this sale.

Financial Performance

Public Bank’s financial performance has been stable, with operating income expected to grow from MYR 13.1 billion in FY23 to MYR 15.5 billion by FY26. The bank’s core net profit is forecasted to reach MYR 7.9 billion by FY26, supported by consistent growth in both interest and non-interest income.

• Key Metrics for FY25:
  • Operating income: MYR 14.6 billion
  • Core net profit: MYR 7.4 billion
  • Core EPS: MYR 0.38
  • ROE: 12.7%

Public Bank continues to maintain strong asset quality, with a gross non-performing loan (NPL) ratio forecasted to remain stable at 0.7% over the next few years.

Conclusion

Public Bank’s acquisition of LPI Capital is expected to bring strategic benefits, including enhanced cross-selling opportunities, improved non-interest income, and integration of distribution channels. The financial impact is expected to be mildly positive, with improvements in earnings and ROE. Public Bank’s capital ratios remain strong post-acquisition, and the group is well-positioned to continue delivering stable financial performance.