Public Bank’s 2Q earnings drop 4.5%

The country’s second-largest lender based on market value reported EPS of 70.66 sen for 1HFY2019, which translates into 48% of analysts’ full-year consensus on Bloomberg, indicating earnings to be within expectations.

In a filing with Bursa Malaysia on Aug 14, Public Bank said its net profit for 2QFY2019 declined 4.5% to RM1.33 billion ($440.8 million), from RM1.4 billion a year ago, -owing 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 a share, payable on Sept 10.

Public Bank said its net interest income (NII) for 2QFY2019 fell 1.5% y-o-y to RM1.85 billion, from RM1.88 billion previously.

Gross loans grew RM13 billion, or 4.2%, to RM323.7 billion, from RM310.7 billion for 2QFY2018, mainly driven by growth in property financing and corporate lending, while total deposits from customers increased 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 FY2019, Public Bank said its net profit fell 2.1% to RM2.74 billion, from RM2.8 billion for 1HFY2018, 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 2Q 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 the resulting falling net interest margins lead to a decline in aggregate net interest income for the system,” says Nomura head of equity research for Malaysia Tushar Mohata.

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

But this might not apply to all banks, as some may 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’s insurance arm and also the proposal by AMMB Holdings to sell its insurance business.

MIDF Amanah Investment Bank 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 NII,” he said.

Nonetheless, from an NII perspective, Imran expects most banks to see weaker NII, as it will be affected 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 price target to reflect the current sentiment brought upon by the uncertain external environment and escalation of the US-China trade war. “At the moment, we believe banks have been undersold,” he says.

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 says.

Public Bank chairman emeritus and adviser Teh Hong Piow, in his statement on Aug 14, 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 were the keys to long-term business sustainability.

Public Bank’s cost-to-income ratio was 34.2% in 2QFY2019, 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, domestic banks were faced with a decline in net interest margins, which affected profit for the first half of FY2019,” he said.

For the overseas business, Teh said the group would continue to focus on growing its retail banking business, particularly tapping the growing opportunities in Indochina.

“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 is targeting to further expand its foothold in the country to 40 branches in the next three years,” he said.

Wong Ee Lin is a writer with The Edge Malaysia