Public Bank's return on risk weighted assets to decline 2.2% over the next 2 years

Blame it on declining margins.

According to Nomura, Public Bank has one of the highest RoRWAs in the sector at 2.3% (FY11), largely driven by a low-cost income ratio of 30%.

Here's more from Nomura:

We see little upside from here; in fact, our forecasts suggest the bank’s RoRWA may decline to 2.2% over the next two years on our expectation of declining margins.

Further, owing to aggressive capital management in FY04-07, the group’s core equity Tier 1 ratio currently stands at 8.3%. To build its capital to a more comfortable level of around 9.5%, we think the bank could either cut its dividend payout to 25% in FY14F or go for a MYR1bn private placement.

Either way, we see a sustainable ROE of ~20.3% post potential equity dilution. An alternative for Public Bank, in our view, would be to move to an IRB approach in estimating the risk weighting given its historically strong asset quality (its asset risk weight is 66% vs the sector average of 62% for the banks we cover).

However, management appears reluctant at this stage given the significant IT/HR investment cost.