AmWatch - Public Bank : Premium for predictability HOLD, 26 Mar 2014

STOCK FOCUS OF THE DAY

Public Bank : Premium for predictability                 HOLD

We maintain our HOLD rating on Public Bank Bhd (PBB), with an unchanged fair value of RM19.80/share. This is based on unchanged FY14F ROE of 21.2% and a fair P/BV of 3.0x. PBB anticipates some moderation in loans this year, but has already budgeted for this in its slower gross loans growth target of 10% to 11% - slightly lower than the 11.8% growth achieved in FY13. For the industry as a whole, PBB’s in-house estimated growth is 8% to 10% for FY14F

PBB reiterated that if there is any need to raise capital, it would most likely embark on a rights issue. This is in line with earlier indications. However, at this point, it expects capital to be sufficient, and will most likely not embark on any capital raising exercise until there is certainty of counter-cyclical buffer required.

The counter-cyclical buffer is widely expected to range between 1% and 1.5% (in line with BASEL3’s recommendation of 0% to 2.5%). Regulators are expected to finalise the ratio before 2016. In the meantime, PBB is expected to maintain its dividend payout ratio close to FY13’s 44.8%. We estimate that every 1ppt increase in required CET1 ratio will mean additional capital requirement of RM2.26bil-RM2.52bil. This represents mere 3%-4% of its market capitalisation.

Assuming that any rights issue has to be priced at about 20% discount to the current market price, we estimate a potential new rights issue of only 165.8mil shares, if the rights issue is priced at RM15.20/rights share. The basis would work out to be 1-right-for-every 21 shares, which is easily digestible, in our view. 

PBB expects to be able to meet its key KPI targets for FY14F. The latest update affirms that PBB remains steady and predictable, with no major surprises anticipated.

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