KUCHING: Public Bank Bhd (Public Bank) is on track to meet its 14 per cent loans growth target for the year, largely driven by its core domestic consumer and small and medium enterprise (SME) credit franchise.
According to OSK Research Sdn Bhd (OSK Research), the abundant domestic liquidity continued to fuel loans growth across its core lending franchise, with mortgages surging 17 per cent, non-residential properties increasing 24 per cent and hire purchase up 13 per cent.
The research house pointed out that price competition in the mortgage segment and the continued upward pressure on fixed deposit rates had taken a slight toll on the group’s recent net interest margin (NIM), which management said would continue to be pressured in the ensuing quarters as competition in the hire purchase (HP) segment only began to pick up recently while mortgage rates were expected to continue to trend down.
OSK Research said based on past experience, competition in the mortgage space only turned rational when gross spreads dipped below 100 basis points (bps) compared with the current average gross spread of 130bps.
Although OSK Research was unable to ascertain the exact percentage of the group’s mortgage portfolio relating to third property financing, the research house believed that the impact of the 70 per cent loan-to-value (LTV) cap would be marginal as the group already enforced a much lower LTV on mortgages relating to second and third property financing and some 89 per cent of its mortgages were for properties below RM500,000 in value, inferring that its overall mortgage transactions were relatively broad based nationwide and typically related to first and second property purchasers.
The research house stated that in order to attain a comfortable capital position while expanding return on equities (ROEs), the group intended to aggressively enlarge its non-interest income, which generated a higher ROE and required less capital, so that excess capital could be deployed for capital management purposes.
The group’s non-interest income ratio to total income currently stands at 22 per cent compared with the peer average of 30 per cent.
The research house said that give the increasing emphasis on capital cost and hence efficiency in capital usage, the group intended to cascade a more ROE-driven and capital efficiency culture across its branches.
This would include leveraging on its large deposit base and extensive branch network to continue growing other wealth management products and enhancing product bundling to increase cross-selling opportunities.
OSK Research stated that its current tie-up with ING Insurance Bhd in the life insurance business was expected to gain traction over the next three to five years, with the business potentially contributing up to 10 per cent of the group’s total fee income within the next five years.
The research house reported that the cumulative earnings from the group’s overseas operations declined 18 per cent in the financial year 2009 (FY09) as a result of a 71 per cent spike in loan loss provisions and greater focus on deposit-taking compared with loans growth.
That said; the overseas contribution to group profit remained small at eight per cent to 10 per cent.
The research house pegged Public Bank’s target price at RM14.20 per share.