This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

Public Bank Bhd’s third quarter financial results, though commendable, showed signs of fatigue in net profit growth, reflecting how much tougher the operating environment has got for banks.

The country’s third largest of eight domestic banking groups — often singled out by analysts as one of the more conservative and better run ones — reported a net profit of RM1.20 billion in the quarter ended Sept 30, 2015 (3QFY2015). On a year-on-year basis, this represents growth of just 0.8%, a sharp contrast with the 13.3% growth seen in the second quarter and 15.2% growth in the first quarter.

On a quarter-on-quarter basis, Public Bank’s net profit growth slowed to barely 0.4%, after 2.2% in the second quarter and 6.6% in the first quarter.

“It’s been weakening since the first quarter,” a banking analyst tells The Edge.

The earnings numbers are in line with analysts’ expectations, but the much slower growth points to a continued trend in the industry moving forward.

Analysts are nevertheless of the view that Public Bank’s 3Q2015 results were commendable, considering the more challenging environment. It comes at a time the industry faces subdued loan growth, a tighter liquidity environment, weak capital market activities and rising credit costs as economic conditions weaken.

Public Bank is usually the early bird among the local banks to release its quarterly results. Given how the well-regarded bank is showing signs of profit growth slowing, it will be interesting to see how its peers perform in the same quarter.

The banks will have to release their June to September quarterly results by the end of next month.

Public Bank did particularly well on the non-interest income front in the third quarter, which grew 31.1% from a year ago, and by 21% in the nine months to date, boosted by foreign exchange (forex) income, unit trust income and a rise in fee and commission income.

“The most significant jump was in forex income, which surged 145% quarter-on-quarter in 3Q15, with Public Bank benefitting from the currency volatility during the period, which led to increased customer flows,” observes Maybank Investment Bank Research in an Oct 23 report.

Loan loss provisions that quarter jumped by 144.3% y-o-y, and by 86.9% q-o-q, to RM113.9 million.

Of its key business segments, notably, its retail operations saw a dip in profit, with pre-tax profit (PBT) falling 10.4% y-o-y to RM862.4 million, mainly due to higher operating expenses and loan impairment allowances. Net interest income that quarter was lower because the quarter in comparison a year ago had benefitted from a hike in the overnight policy rate.

Public Bank’s hire purchase segment’s PBT fell 23.5% to RM75.2 million, largely due to a margin squeeze from higher funding cost.

For the nine-month period, Public Bank’s net profit came in at RM3.57 billion, an increase of 9.3% from the same period a year ago, coming in at 75% of an analyst consensus forecast for the full year.

Public Bank continued to outperform the industry in terms of return on equity (ROE), asset quality and cost efficiency. ROE came in at at 16.9% for the nine months to date, while its gross impaired loan ratio (GIL) stood at 0.53% — a slight improvement from 0.54% in 2Q2015 — and remained far better than the industry average of 1.6%. Its loan loss coverage ratio of 130.8% was also way more prudent than the industy average of 97.6%.

Its cost-to-income ratio (CIR) of 30.7%, though far below the industry average of 45.5%, crept up from 30% in FY2014 due to higher expenses.

Its annualised loan growth was still strong at 12.5% at group level, boosted by loans from its Hong Kong and Cambodian operations, given the ringgit depreciation. At the Malaysian operations, loan growth stood at 10.5%, which was higher than the industry average of about 8.2%.

“We observe a rise in the group’s impaired loans by 1.8% q-o-q on absolute value basis. This was seen contributed by higher impairment of loans extended to the construction, wholesale and retail trade, and restaurants and hotels and real estate sectors. In terms of loans by purpose, the rise in loan impairment was seen contributed by higher impaired working capital as well as personal loans,” says MIDF Research.

Deposit growth at group level slowed to 9.5% and at home, by 7.4%, which analysts say is decent considering the increasingly stiff competition among banks in chasing deposits.

The group’s net interest margin (NIM) in the third quarter improved marginally to 2.16% from 2.11% in the preceding quarter, but was still lower than the 2.29% recorded a year ago. There will continue to be pressure on NIM going forward, analysts say.

“We expect funding costs to intensify towards 4Q15, and this would place further pressure on NIM. We think that this could compel management to bring down loans growth closer to the 9% to 10% level,” says UOB Kay Hian Research.

Bloomberg data shows that of 25 analysts that track the stock, most (12) have a “hold” call on it because of its relatively rich valuations, while six have a “buy” and the rest, a “sell”. The average 12-month target price was RM19.02. It closed at 18.64 last Thursday.

“Despite challenging times ahead, we believe Public Bank will continue to deliver sustainable earnings growth (for the full year) of around 10%. Contribution from its asset management business will continue to set the bank apart from peers,” says AllianceDBS Research.

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