Public Bank 2Q earnings drop 4.5%

TheEdge Thu, Aug 15, 2019 10:00am - 4 years View Original


KUALA LUMPUR: Despite reporting a 4.5% decline in net profit for the second quarter ended June 30, 2019 (2QFY19), Public Bank Bhd’s earnings remain very much within the consensus estimate.

According to Bloomberg data, Public Bank’s average earnings per share (EPS) estimate for the full year (FY19) is RM1.472.

The country’s second largest lender based on market value reported EPS of 70.66 sen for the first half of FY19, which translates into 48% of analysts’ full-year consensus on Bloomberg, indicating earnings to be within expectations.

In a filing with Bursa Malaysia yesterday, Public Bank said its net profit for 2QFY19 declined 4.5% to RM1.33 billion, from RM1.4 billion a year ago, due to the negative effect of a 0.25% reduction in the overnight policy rate (OPR) in May, the first revision after a 0.25% increase in January 2018.

EPS for the quarter fell to 34.34 sen, from 36.13 sen previously. The group declared a first interim dividend of 33 sen per share, payable on Sept 10.

Public Bank said its net interest income (NII) for 2QFY19 fell 1.5% year-on-year (y-o-y) to RM1.85 billion, from RM1.88 billion.

Gross loans grew by RM13 billion or 4.2% to RM323.7 billion from RM310.7 billion for 2QFY18, mainly driven by growth in property financing and corporate lending, while total deposits from customers increased by 5.8% or RM19.2 billion to RM349.1 billion.

The bank’s gross impaired loan ratio continued to remain stable at 0.5% as at June 30.

For the first six months of FY19, Public Bank said its net profit fell 2.1% to RM2.74 billion, from RM2.8 billion for the first half of FY18, while NII declined 1.23% to RM3.73 billion from RM3.78 billion.

Analysts contacted by The Edge Financial Daily said while Public Bank saw a drop in second-quarter earnings, this does not reflect the situation at some other banks.

“Given that system loan growth for the sector is very slow and is likely to fall near the lower end of the 4% to 5% range, the risk is that OPR cuts and resulting falling net interest margins lead to a decline in aggregate net interest income for the system,” said Nomura head of equity research for Malaysia Tushar Mohata.

In such a scenario, he said stocks like Public Bank, which are already very efficient (reporting low credit costs and a lean operating expenditure structure), find it hard to grow earnings y-o-y.

But this might not apply to all banks as some of them might still report some earnings growth through NII, falling credit costs and write-back or positive jaws.

On catalysts for the banking sector, Mohata cited the potential asset disposal of RHB Bank Bhd’s insurance arm and also the proposal by AMMB Holdings Bhd to sell its insurance business.

MIDF Amanah Investment Bank Bhd analyst Imran Yassin Yusof concurred, saying that each bank has different factors driving its earnings.

“However, we do expect that banks will be experiencing pressure on their income coming from weakened net interest income,” he said.

Nonetheless, from a NII perspective, Imran expects most banks to see weaker NII as it will be impacted by the OPR cut.

While he would not be revising the “buy” call on Public Bank as the results were within expectations, Imran will be revising the target price to reflect the current sentiment brought upon by the uncertain external environment and escalation of the US-China trade spat.

“We believe banks have been undersold at the moment,” he said.

At the moment, Imran expects earnings to be stable despite the pressure on income. “The impact from the OPR cut will be felt for at least one more quarter before normalising. The only upside catalyst at the moment could be lower credit cost,” he added.

Public Bank chairman emeritus and adviser Tan Sri Teh Hong Piow, in his statement yesterday, said in the face of increasing challenges from moderating growth of the domestic banking sector and continued interest margin compression, maintaining cost efficiency and preserving strong asset quality are keys to long-term business sustainability.

Public Bank’s cost-to-income ratio was 34.2% in 2QFY19, compared with the industry average of 44.6%.

“The economic and banking environment was increasingly challenging. In addition to this, arising from the reduction in the OPR in May 2019, domestic banks were faced with a decline in net interest margins which affected profit for first half of FY19,” he said.

For the overseas business, Teh said the group will continue to focus on growing its retail banking business, particularly tapping the growing opportunities in Indo-China.

“Besides Cambodia, the group is actively expanding its branch network in Vietnam. For the past two years, the group has opened 11 new branches in Vietnam, and the group is targeting to further expand its foothold in the country to 40 branches in the next three years,” he said.

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