Can Public Bank's Stock Price Rebound?

Public Bank leads on the profitability front with an unbroken profit track record since its listing in 1967 while keeping its operating costs lean. The group’s cost-to-income ratio of between 29% and 35% over the 2011-2023 period was the lowest among domestic banking peers.

According to the latest financial report released by the company, in the first quarter of 2024, the total revenue of PBK was RM3.38 billion, a year-on-year increase of 2.3% and a quarter-on-quarter increase of 3.7%, maintaining a good overall growth trend. Breaking it down:

Net interest income was MYR 2.317 billion, with slight year-on-year and quarter-on-quarter increases. PBK's net interest margin (NIM) for Q1 was 2.21%, slightly exceeding the average level of 2.20% for the full year of 2023. This metric measures the ability of a bank to earn net interest income from loans and other interest-earning assets. Factors that affect this metric include market interest rates, the bank's asset portfolio and quality, and the bank's pricing strategy. If market interest rates rise, new loans made by the bank may have higher interest rates, thereby increasing net interest income. The proportion of high-yielding assets (such as certain types of loans) versus low-yielding assets (such as government bonds) in a bank's asset portfolio can also affect NIM. Increases in loan defaults and bad debt provisions may reduce net interest income, thereby affecting NIM. According to official disclosures, the company actively improved NIM by proactively managing the cost of funds, and the 6.3% loan growth provided momentum for the improvement of PBK's net interest margin.

Non-interest income was MYR 649 million, with growth compared to the past. The biggest factor affecting it was unit trust income, which increased by 19.3% year-on-year.

Islamic banking income was MYR 4.13 billion, which was also affected by margin tightness in 2023, but is expected to resume growth in 2024, supported by diversification and enhancement of its product offerings.

In Q1 2024, BPK's pre-tax profit was MYR 2.132 billion, a year-on-year decrease of 3.5%. Looking at different businesses, the revenue of each business has increased to varying degrees. Based on the proportion of revenue, the businesses with the fastest revenue growth are Hire Purchase, Corporate Lending, and Fund Management. Investment banking revenue is also increasing, but accounting for less than 1%, with less impact.

The overall decline in profits is mainly due to the significant decrease in the profitability of overseas and other businesses, which decreased by 25.7% and 24.6% year-on-year, respectively. The main reason for this phenomenon is the increase in other operating expenses, such as a 12.5% increase in personnel costs, which is due to internal salary adjustments within the group. However, the company's current cost-to-income ratio (CIR) is 35.4%, lower than the Malaysian market's average level of 48.7%, indicating that the increase in expenses may be related to the increasingly competitive market environment, rather than poor company operations.

As of Q1 2024, PBK's Group Deposits were MYR 420.2 billion, a year-on-year increase of 7.1%; Domestic Deposits were MYR 391.9 billion, a year-on-year increase of 7.3%. Group Loans were MYR 405.3 billion, a year-on-year increase of 6.3%; Domestic Loans were MYR 378.2 billion, a year-on-year increase of 5.9%. Overall, the company's borrowing and lending amounts show a healthy growth trend. Moreover, the loan business is mainly concentrated in the lower-risk retail sector, especially residential properties, and adopts a prudent risk pricing method, making its asset quality and profitability higher than that of its peers.

With sufficient funding and healthy liquidity, PBK's balance sheet performance is relatively stable. According to data, the company's risk-weighted capital was MYR 339.0 billion, of which the Tier I capital ratio was 14.5% and the Total capital ratio was 17.4%, maintaining good asset quality and capital adequacy. The Liquidity Coverage Ratio (LCR) was 136.5%, slightly lower than the market average of 150.3%, indicating that the company pays attention to investment returns while having a good ability to resist risks.

In Q1 2024, PBK's earnings per share were MYR 8.52, a year-on-year decrease of 3.5%. The main reason for this was the company's relatively high operating costs.

However, according to management statements, the year-on-year decline in profits is related to the industry as a whole rather than the company's operations. Looking ahead, if PBK can maintain its relatively low costs compared to peers, EPS is expected to increase with the market's recovery.

Based on the analysis mentioned earlier, the management has given an optimistic outlook for the company's stable loan growth, stable net interest margin (NIM), and cost-to-income ratio (CTI) for the next 24 years:

·Loan growth target: 5-6%, with an expected growth of 5.9% in 2023.

·CTI: 35.4% in 2023, which is lower than the industry average of 48.7%.

·Net interest margin (NIM): 2.21%, slightly higher than the expected 2.20% in 2023.

Based on this, Malaysia Bank expects PBK's earnings per share to be RM 0.35/0.38/0.40 respectively for the next three years, with a gradual increase from RM 0.34 in 2023.

Since the beginning of the year, the company's stock price has fluctuated significantly, currently down 1.68%, underperforming among Malaysian bank stocks. The company's TTM P/E ratio is 12.04x, which is not cheap considering the recent decline. The dividend yield is 4.6%, which is relatively low compared to other banks. However, historically, the company has maintained a stable dividend payout, demonstrating a commitment to rewarding shareholders.

Overall, as one of the top three banks in Malaysia, PBK's operations do not have any major issues. However, the increase in operating costs in the first quarter resulted in a decline in profits, leading to investor selling and a subsequent decline in stock prices. Looking ahead, if PBK can restore its industry-leading profitability, the stock price may rise. However, risks such as long-term high interest rates and geopolitical conflicts still exist. Investors need to closely monitor changes in interest rates and the overall economic environment. If the consumer sector and asset management industry regulations tighten again, it may have an extremely adverse impact on the stock price.