PETALING JAYA: The worst might have been over for Public Bank Bhd in the fourth quarter ended Dec 31,2020 (Q4’20), as credit cost is expected to improve in 2021 and management can front-load part of 2021 provisions into Q4’20 earnings, according to UOB Kay Hian Research.

The research house said it expects Public Bank to report a 14% quarter-on-quarter and 15% year-on-year contraction in Q4’20 earnings on the back of higher pre-emptive provisions with net credit cost coming in at 60 to 65 basis points (bps), compared with 40 bps in Q3’20).

UOB Kay Hian noted that when Public Bank’s management had formulated its 30 to 35 bps net credit cost guidance for 2020 back in Q4’20, it took into account two key assumptions, notably a more stringent movement control order (MCO) 2.0.

However, the ongoing MCO 2.0 is proving to be less punitive on overall economic activities than initially expected.

UOB Kay Hian also said it is highly possible that the current restructuring and rescheduling (R&R) assistance measures would be extended beyond end-June 2021 to avoid a “cliff effect” on non-performing loans (NPLs) as positive effects of the Covid-19 vaccination rollout will be gradual.

Public Bank’s management has indicated that should the MCO 2.0 not drag on for too long, a large proportion of its customers under the R&R scheme are unlikely to turn NPL.

Public Bank’s loans under targeted assistance had only inched up marginally from the 9% to 10% level in October 2020 to 10% to 11% as at mid-February 2021.

Assuming no further rate cut, Public Bank is expecting a low single-digit net interest margin (NIM) expansion in 2021, partially supported by still-robust current account and savings account growth and benign deposit competition with fixed deposits still reflecting a slight contraction.

Moving forward to 2021 and 2022, the research unit has assumed a recovery in dividend payout to pre-Covid-19 levels of 45% to 50%, implying a dividend yield of 3.0% and 3.5% respectively.

This compares favourably to its pre-Covid-19 average implied yield of 2.5% to 3.0%.

UOB Kay Hian is maintaining its “buy” call on Public Bank’s stock, but raised its target price to RM4.60 from RM4.20 previously.