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Tuesday, September 29, 2009

Public Bank Target Price At RM12.20

Second to none
  • Beneficiary from adoption of FRS 139 due to excessive regulatory general provision reserves
  • Well positioned to benefit from recovery in consumer loan growth coupled with excellent asset quality and high ROEs.
  • Higher valuation justified. Buy (TP raised to RM12.20) for resilient earnings, ROEs and dividends.

Beneficiary of FRS 139 adoption. Public Bank would be a key beneficiary from the adoption of FRS139 as it would save credit costs for general provisions (GP) going forward. As it is now, GP reserves amount to RM1.8bn, of which at least half can be written back as it can be considered excess provisions given Public Bank’s asset quality position. The write-back would be made into retained earnings, which would mean some upside to Tier-1 capital. What remains uncertain is whether the amount written back can be distributed to shareholders.

Excellent proxy for consumer recovery. Public Bank still stands out as an excellent proxy of a quality bank. Loan growth still outpaces industry average while asset quality is still the best among peers. A surprise could come from a new non-interest income stream emerging from its tie-up with ING, which was sealed in 1Q08. Currently, it is still negligible, but over the next 5 years, it is estimated to comprise at least 10% of total fee income, giving it some latitude to diversify its reliance on unit trust sales and management fees. We have raised earnings by 1-6% to account for higher loan growth and non-interest income.

Higher valuation justified. While valuations have surpassed +1SD of its historical 5 year mean, we believe Public Bank still remains a core holding for its superior qualities, chiefly asset quality, ROEs and dividends. ROE profile is expected to improve with less capital intensified
non-interest income activities and cost savings from FRS 139 implementation. There is a possibility of higher dividends from capital savings when Public Bank paid share dividends last year. Buy with TP raised to RM12.20 based on the Gordon Growth Model equivalent to 3.8x FY10 BV.

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