Public Bank Bhd (Jan 17, RM13.18)
Upgrade to buy at RM13.14 with a revised fair value of RM15.40 (from RM13.40): We are upgrading our rating on Public Bank Bhd (PBB) to “buy” from “hold”, with a higher fair value of RM15.40 per share (RM13.40 previously). This is based on an upgraded return on equity of 24% (21.8% previously) for FY12F, leading to a fair price-to-book value (P/BV) of 3.5 times (3.2 times previously).
The newly released guidelines on implementation of Basel III are likely to have a positive impact on PBB in terms of less pressure on capital on two fronts. First, the implementation of a counter-cyclical buffer will now likely take place in 2015. Previously, counter-cyclical buffers were widely expected to be set at 1% to 1.5%, with a timeline for implementation by end-2012. However, under the new guidelines, local regulators are expected to issue concept papers outlining the rules and mechanisms to implement the new capital buffers by 2014.
Second, we understand that local regulators have extended the consultative process to determine possible additional capital requirements under Pillar 2 of Basel II. Recall that in July 2011, PBB first hinted that the central bank may look at raising the capital requirements under Pillar 2 of Basel II (whereby individual banks are assessed based on their own risk profiles), which may involve a higher capital of between 1% and 2%.
This means any possible rights issue by PBB will take place from 2015, rather than from end-2012. This removes the immediate short-term concerns over a possible capital raising exercise. We believe PBB may be allowed to move towards full adoption of FRS139 accounting standards. At the moment, all local banks have adopted the transitional provisions of FRS139 since 2010 with a view towards full FRS139 adoption by 2012. The only exceptions are CIMB Bank and Malayan Banking Bhd, which had crossed over to full FRS139 basis immediately in 2010.
A full adoption of FRS139 will allow PBB to lower its collective assessment (widely perceived to be similar to general provision under the old GP3), from 1.5% to 0.7%. This could lead to a writeback into shareholders’ funds of RM1.1 billion, leading to a possible boost to book value by 31 sen per share or 7%, core equity ratio by 0.3%, and possibly reducing the size of potential rights issue in 2015. P/BV would be reduced from three times to 2.8 times — the trough valuation level of 2008. — AmResearch, Jan 17
This article appeared in The Edge Financial Daily, January 18, 2012.
Upgrade to buy at RM13.14 with a revised fair value of RM15.40 (from RM13.40): We are upgrading our rating on Public Bank Bhd (PBB) to “buy” from “hold”, with a higher fair value of RM15.40 per share (RM13.40 previously). This is based on an upgraded return on equity of 24% (21.8% previously) for FY12F, leading to a fair price-to-book value (P/BV) of 3.5 times (3.2 times previously).
The newly released guidelines on implementation of Basel III are likely to have a positive impact on PBB in terms of less pressure on capital on two fronts. First, the implementation of a counter-cyclical buffer will now likely take place in 2015. Previously, counter-cyclical buffers were widely expected to be set at 1% to 1.5%, with a timeline for implementation by end-2012. However, under the new guidelines, local regulators are expected to issue concept papers outlining the rules and mechanisms to implement the new capital buffers by 2014.
Second, we understand that local regulators have extended the consultative process to determine possible additional capital requirements under Pillar 2 of Basel II. Recall that in July 2011, PBB first hinted that the central bank may look at raising the capital requirements under Pillar 2 of Basel II (whereby individual banks are assessed based on their own risk profiles), which may involve a higher capital of between 1% and 2%.
This means any possible rights issue by PBB will take place from 2015, rather than from end-2012. This removes the immediate short-term concerns over a possible capital raising exercise. We believe PBB may be allowed to move towards full adoption of FRS139 accounting standards. At the moment, all local banks have adopted the transitional provisions of FRS139 since 2010 with a view towards full FRS139 adoption by 2012. The only exceptions are CIMB Bank and Malayan Banking Bhd, which had crossed over to full FRS139 basis immediately in 2010.
A full adoption of FRS139 will allow PBB to lower its collective assessment (widely perceived to be similar to general provision under the old GP3), from 1.5% to 0.7%. This could lead to a writeback into shareholders’ funds of RM1.1 billion, leading to a possible boost to book value by 31 sen per share or 7%, core equity ratio by 0.3%, and possibly reducing the size of potential rights issue in 2015. P/BV would be reduced from three times to 2.8 times — the trough valuation level of 2008. — AmResearch, Jan 17
This article appeared in The Edge Financial Daily, January 18, 2012.
