Public Bank (PBKF MK, RM10.24, OP, TP: RM11.60, 13.3% upside) - Early redemption of sub-debt (Chin Seng Tay)

Event

• Public Bank has redeemed a US$350m subordinated debt which it issued in 2004. The early redemption is part of its capital management initiatives.

Impact

• The US$350m subordinated debt carried a coupon rate of 5.625%, and was redeemed on 22 September 2009. With the redemption, the group's CAR is estimated to be at 12.9%, compared with 13.9% as at 30 June 2009. The Tier 1 ratio of the group remains unaffected at 8.7% (bank-level Tier 1 was 11.2%).
• Note that the group had announced earlier a programme to issue up to RM5.0bn in non-cumulative Perpetual Capital Securities, which are stapled to subordinated notes, under a Non-innovative Tier 1 Stapled Securities Programme. To date, it has issued RM1.2bn of such securities. There is room for the group to raise more such funding, if need be.
• We believe capital management initiatives remain strong, given the interim dividend of RM0.30 (gross) and the 80.4m in treasury shares, which may be paid out to shareholders. At this point in time, our FY09 dividend estimate does not include the potential issue of these treasury shares to shareholders, which could potentially offer a significantly higher yield than our estimated 5.3% for FY09.

Action and recommendation

• The group has continued to track well with loan growth of 7.2% YTD in June, compared with the sector growth rate of 2.2%. At the same time, asset quality has remained pristine, with its 0.9% NPL ratio. Coupled with the potential for further capital management initiatives, we are maintaining our Outperform recommendation.