PBBANK: Strong First-Half Performance Driven by Operating Income Growth

Public Bank Berhad (PBB) delivered a robust financial performance in the first half of FY25 (1HFY25), with net profit increasing 2.5% year-on-year (YoY) to RM3,506 million. The results were largely in line with expectations, representing approximately 48% of TA Securities’ full-year estimates. The bank’s annualised 1HFY25 Return on Equity (ROE) stood at 12.6%. The bank also announced a higher first interim dividend of 10.5 sen per share, up from 10.0 sen per share in 1HFY24, equating to a payout ratio of 58.1%.

Robust Income Growth Underpins Performance

The improved performance was primarily anchored by a 6.8% YoY increase in net income, driven by significant contributions from both net interest/financing income (NII) and non-net interest/financing income (non-NII). NII saw a 4.1% YoY growth, while non-NII experienced a substantial 17.5% YoY boost, largely due to higher net gains and losses on financial instruments, which amounted to RM107.4 million in 1HFY25, compared to RM58.2 million a year ago. Despite a 6.7% YoY rise in operating expenses, partly attributable to a one-off compensation expense, the cost-to-income ratio remained stable at a healthy 35.3%, significantly below the industry average of 43.5%. Elsewhere, income from the general insurance business grew to RM77.4 million in 2Q25, and Banca business generated around RM303 million in annualised new premium, an increase of 26% YoY.

Solid Loan and Deposit Dynamics

PBB demonstrated solid loan growth, with group loans expanding 5.1% YoY, underpinned by a healthier 6.1% increase in domestic loans, maintaining a domestic market share of 17.8%. Growth was broad-based across segments, with hire purchases leading the way at +13.4% YoY, followed by domestic SMEs at +12.0%, commercial properties at +6.0%, and residential properties at +5.3%. However, the net interest margin (NIM) experienced a slight compression, slipping 2 basis points (bps) year-to-date to 2.19% from 2.21% in FY24, and narrowing 1 bp quarter-on-quarter to 2.18%. Total deposits broadened by 3.5% YoY, with Money Market Deposits surging by 28.4%, helping to cushion a decline in Fixed Deposits and a contraction in Saving Deposits. The bank’s market share in customer deposits improved slightly to 16.6%.

Asset Quality and Capital Strength

The bank’s asset quality remained sound, with the gross impaired loans (GIL) ratio steady at around 0.5%. Domestically, GIL for residential properties, commercial properties, and transport vehicles remained stable, while the GIL ratio for SMEs improved slightly. Loan loss allowances increased YoY to RM73.1 million. PBB is backed by a robust capital position, with a Common Equity Tier 1 (CET1) Capital Ratio of 14.0% and a Total Capital Ratio of 16.8%.

Outlook Amidst Headwinds

Management remains confident in achieving 5-6% loan growth and 4-5% deposit growth for FY25, aiming for a 13% ROE by year-end. Asset quality is expected to remain stable, with credit costs guided to stay in single digits, supported by approximately RM1.0 billion in management overlays. The dividend payout is targeted to rise to 60% for the full year. However, margin pressure remains a key challenge, with PBB trimming its NIM guidance to a mid-to-high single-digit compression for 2025 due to heightened deposit competition and the impact of a 25bps OPR cut. Competitive intensity in lending, particularly for mortgages and SME/commercial segments, also contributes to this pressure.

Valuation and Recommendation

TA Securities has maintained its target price (TP) at RM5.15, implying an upside of 16.5% from the last traded price of RM4.42. The valuation is based on an implied price-to-book value (PBV) of approximately 1.5x, derived from the Gordon Growth Model, and includes a 3% ESG premium. The investment bank reiterates its BUY recommendation on the stock.