UOBKH Research believes that the deterioration in Hong Kong operations’ asset quality was not systemic in nature.
PETALING JAYA: Public Bank Bhd
has the strongest headroom among its peers for potential provision write-backs, making it an attractive stock as it stands to benefit once macroeconomic conditions improve.
“When the delinquency rate was nearly double at 4% (2018 to 2019), the group recorded an average net credit cost of five basis points, which was at the lower end of its current guidance.
“Coupled with a higher loan loss coverage ratio of 169% (pre-Covid-19: 124%), there is clearly a case for strong potential downside surprise in credit costs,” UOB Kay Hian (UOBKH) Research said.
The research house projected Public Bank’s 2024 and 2025 net credit costs at five basis points, which is at the lower end of the bank’s guidance of between five and 10 basis points, on the scenario the domestic delinquency rate stays at the current 2% level.
“Our sensitivity analysis indicates a potential net credit cost write-back of up to 40 basis points, which could increase financial year 2024 (FY24) earnings by 19%,” it added.
UOBKH Research noted that its current domestic loan delinquency rate of 2.3% is well below the pre-pandemic level of 3.6% in 2019, and the current domestic gross impaired loans (GIL) ratio of 0.4% is at the pre-pandemic level of 0.4%.
“As such, despite comprising 93% of total loans, domestic GIL represents a disproportionately lower 62% of total group GIL,” it said.
The research house highlighted that Public Bank’s asset quality was impacted largely by a single account in Hong Kong.
It said Public Bank’s GIL ratio rose to a 10-year high of 0.63% in the first quarter of this year (1Q24), largely due to a single syndicated commercial property loan from its Hong Kong operations.
The GIL ratio for its Hong Kong operations increased from 1.29% in 4Q22 to 4.16% in 1Q24, with the aforementioned account contributing around 78% of this rise.
However, UOBKH Research believed the deterioration in Hong Kong operations’ asset quality was not systemic in nature.
“Despite ongoing economic challenges in Hong Kong, management has indicated that asset quality stress within its Hong Kong operations is largely contained to the above mentioned syndicated commercial property loan.
“This impacted loan has been fully impaired, and any additional potential provision will not be significant given its loans loss coverage ratio of over 50% and the accompanied property as collateral,” the research house explained.
It did not expect a huge impact even if asset quality there deteriorates further given that its Hong Kong operations represent only 4.5% of group loans.
The research house added that even if the Hong Kong GIL ratio were to double to 8% in the worst case scenario, the incremental impact on the overall group GIL ratio would be a manageable 14 basis points, raising the group GIL ratio to 0.76%, still below management’s guidance of below 1% GIL ratio.
Additionally, the bank has RM1.7bil in pre-emptive provisions, which can be utilised against an estimated RM290mil in required provisions on the worst-case scenario assumption.
UOBKH Research believed Public Bank’s share price had lagged due to its low beta and initial valuation premium and is set for out-performance as the market factors in potential earnings surprises from lower credit costs and stronger loan growth.
“Its current price-to-book is 20% higher than the industry average, correlating with its 12% return on equity versus the industry’s 10%, indicating that it no longer commands a valuation premium,” it said.
The research house has maintained a “buy” recommendation on the counter with a target price of RM5.10, which is in line with its historical mean price-to-book valuation.
“Current price-to-book valuation of 1.4 times values the stock at one standard deviation below its historical mean, which we deem attractive given its strong defensive qualities,” it said.
