17 minutes
PETALING JAYA: Public Bank Bhd is viewed as one of the safest banking stocks to own during the economic downturn, as it is the least sensitive to the Overnight Policy Rate (OPR) cuts and has defensive asset quality, said CGS-CIMB Research.
It lowered its FY20-22 net profit forecasts for Public Bank by 3-5% as it factors in a further 75 basis point (bps) OPR cut and lowered its projected loan growth for FY20 by 4 percentage points, as the Covid-19 outbreak will dent loan demand.
However, the research house expects Public Bank to have the lowest net profit decline in the sector, because its floating-rate loan ratio of 77% for FY20 is close to the sector’s average of 76.5%, a high percentage of its deposits will be repriced down in the event of an OPR cut, and about 7% of its loans are from its overseas operations and, hence, will not be affected by the OPR cut.
In terms of asset quality, CGS-CIMB noted that Public Bank’s gross impaired loans (GIL) ratio has consistently been the lowest among local banks, at 40% of the industry’s GIL ratio since 1998.
“We maintain our FY20 GIL assumption of 0.5% for Public Bank, a slight increase from 0.49% in FY19 and below our projected 1.7% for the industry,” it said.
CGS-CIMB is maintaining its ‘add’ call on Public Bank with a target price of RM20.40, as the projected 125 bps OPR cut is likely to have an impact of 5.5% on the bank’s FY20 net profit, the lowest in the sector.
CGS-CIMB also retained its ‘add’ call on RHB Bank Bhd, given the potential re-rating catalyst of higher fee income from a new bancatakaful partnership, the management’s ability to limit the uptick in GIL in 2020 and attractive valuation.
RHB is said to be evaluating the proposals from various takaful operators for a new bancatakaful partnership, which will take effect from Aug 1, 2020 onwards, as its existing agreement with Syarikat Takaful Malaysia Keluarga expires on July 31, 2020.
Although the research house lowered its FY20-22 earnings per share forecasts for RHB by 2.5-7% as it factors in another OPR cut of 50bps, it expects an upfront fee of over RM100 million to be paid to RHB for the new bancatakaful partnership, which would enhance its FY20 net profit by at least 3.2%.
It has yet to factor this into its earnings forecasts for RHB.
“Under the new tie-up, we think RHB would be able to earn a higher fee and distribute more takaful products compared with the existing agreement. These would help to partly cushion the negative impact of the Covid-19 pandemic and accelerate RHB’s recovery post the Covid-19 outbreak,” said CGS-CIMB.
The research house added that the management of RHB has successfully transformed the bank, as reflected by the improvements in the past three years, including a decline in the GIL ratio to 2% in 2019; a drop in the cost-to-income ratio to 48.9% in FY19, and a three-year compound annual growth rate of 18.2% in Islamic banking income.
