Public Bank - Growth driven by domestic operations

Slight improvement in 2Q. 2Q09 results likely to grow marginally qoq, vs 1Q09 net profit of RM589.3m. 2Q09 results will be supported by better-thanexpected performance from Public Mutual (6%-7% of group PBT) on higher fee income generated from new unit trust sales and also higher management fees from record net asset value of RM29b in Jun 09. Meanwhile, net interest income would be flat due to margin squeeze as deposit rates are yet to be fully repriced and as competition drives mortgage rates lower.

Loan growth better than expected. 2009 loan growth would be domestically driven as the Hong Kong operations continue to be dragged down by weak economic activities. 2Q09 loan growth is expected to reach 4% qoq, bringing 1H09 loan growth to approximately 7%. Based on loan approvals growth of 10-12% ytd, Public Bank is likely to achieve a loan growth of 14-15% in 2009, much higher than our expectation of 6%. The variance comes from stronger-than-expected mortgages and auto loans for national car financing.

Core capital ratio strengthens. Public Bank successfully raised RM1.2b non-innovative Tier 1 capital in early Jun 09, boosting its core capital ratio from 7.6% to 8.7%. The bank has set a plan to issue up to RM5.0b (issued: RM1.4b) of sub-debt and RM5.0b (issued: RM1.2b) of non-innovative Tier 1 capital. The balance will be issued to support loan growth.

High dividend yield still a main focus. The bank will at least maintain 2008 cash dividend to ensure reasonably high dividends. In 2008, Public Bank paid a total 55sen/share gross cash dividend (41sen/share net). This translates into an attractive 6.2% gross dividend yield based on the current share price of RM8.85, compared to Malaysia’s FD rates: 2.0% for 1 to 11-month FDs or 2.5% for 12-month FDs. We are expecting an interim gross dividend of at least 20sen to be announced during its 1H09 results in mid-Jul 09.

We have revised up our 2009 earnings forecast by 5.1% to RM2.11b (EPS: 59.9sen) from RM2.01b (EPS: 57.0sen), to reflect: a) higher loan growth of 15% (previous: 6%), b) higher non-interest income of RM1.3b (previous: RM1.2b) and c) higher operating costs as commissions to pay for better unit trust sales.

Maintain HOLD. Our revised fair price of RM9.00 (based on revised BV/share: RM2.86) from RM8.60 (previous BV/share: RM2.75) implies a target P/B ratio of 3.13x, derived from the Gordon Growth Model (ROE: 18%, payout ratio: 65%, required return: 10%).