A re-rating is imminent for Public Bank Bhd – Malaysia’s third-largest banking group by asset size – after its share price rose a sharp 21% since the positive news emanating from the Pfizer-BioNTech vaccine development.
In a way, this underscores investor preference for banks with asset quality strength even as they begin to rotate into cyclical stocks.
Likewise, a banking sector re-rating should sustain as investors gain vaccine-induced confidence on the eventual recovery in both earnings and the economy, according to RHB Research.
“That said, sporadic resurgence and lockdowns could still happen and would pose downside risk to earnings,” wrote analysts Fiona Leong and Liew Wai Hoong in a company update.
“Public Bank’s solid asset quality and high provision buffers will safeguard investors against such risks, in our view.”
In this regard, RHB Research opined that loans under Public Bank’s targeted relief assistance (TRA) is manageable.
Prior to the current conditional movement control order, borrowers requiring TRA make up a “single-digit” percentage of the bank’s retail and small & medium enterprise (SME) loans.
This compared to 66% of loans under the automatic moratorium back in August. Most of the affected retail accounts consist of mortgage loans while applications from SMEs are generally broad-based with construction firms displaying more stress.
“We believe that the enhanced TRA proposed in Budget 2021 would not result in a material increase in loans under TRA,” projected the research house.
“The management believes that customers impacted by the pandemic have already been approved for further assistance. Furthermore, lending to B40 individuals make up less than 5% of total loans.”
All-in, RHB Research reiterated a “buy” rating on Public Bank with a higher target price of RM20.60 (from RM18.40 previously).
“Pending the release of its 3Q FY2020 results in the coming week, we make no changes to our earnings forecasts,” added RHB Research.
“Key risks to our recommendation include a sharper-than-expected rise in non-performing loans that will result in higher-than-expected credit costs, and weaker-than-expected growth in operating income.”
At 4.04pm, Public Bank was up 52 sen or 2.81% at RM19 with 7.81 million shares traded, thus valuing the bank at RM73.76 bil. – Nov 17, 2020
