PBBANK: Bank’s Profitability Stabilizes Amidst Margin Pressures, Target Price Revised Upwards

A leading financial institution reported its second-quarter and half-year results for FY25, delivering a core net profit of RM3,505 million for 6MFY25. This performance aligned with internal and street forecasts, representing 48% and 47% of full-year estimates, respectively, and marked a 2% increase year-on-year. For the second quarter alone, core net profit stood at RM1,760 million, showing a 1% improvement quarter-on-quarter, largely attributed to enhanced net interest income (NII) successfully offsetting increased operating expenses (OPEX).

Performance Review

The institution demonstrated robust cost control, a key factor contributing to its stable earnings performance. While NII improved, non-interest income (NOII) is anticipated to be a significant driver for the remainder of FY25, particularly from bancassurance and unit trust performance. This strategy is crucial as management projects NOII to compensate for a reduced NII environment. Dividends of 10.5 sen per share were announced for 6MFY25, reflecting a 58% payout ratio.

Challenges and Strategic Adjustments

Despite the steady performance, management has slightly revised its net interest margin (NIM) target downwards, acknowledging intense competition in residential mortgages and SME loan segments. NIM compression remains a primary headwind. Although the bank has experienced a decline in its Current Account Savings Account (CASA) market share, management prioritizes margin preservation over aggressive, high-cost CASA campaigns, citing a significantly lower cost per deposit account compared to peers. The group also acknowledges that it is currently trailing its FY25 deposit growth target of 4-5% in the first half. Furthermore, the ambitious 13% Return on Equity (ROE) target for FY25 is viewed as overly optimistic by analysts, requiring a substantial 14.0% ROE in 2HFY25 to be met. The outlook for Hong Kong’s operations, while brighter after previous asset quality issues, still faces uncertainty regarding the extent of recovery.

Future Outlook and Recommendation

The institution is expected to benefit from decent loan growth and a strong contribution from fee income as a major topline driver. Analysts maintain a BUY recommendation, revising the target price slightly upwards to RM4.82 from RM4.77. This revised target price is based on an updated FY26F Price/Book Value (P/BV) of 1.45x, reflecting altered earnings prospects and ROE-based valuations.

Key Downside Risks

Potential headwinds include lower-than-expected loan growth, weaker non-interest income (NOII) performance, and steeper-than-anticipated net interest margin (NIM) compression.