The Group reported a sequentially stronger 3QFY20 net profit of RM1.95bn (-2.3% YoY, +107.2% QoQ) in the absence of Day-One net modification losses charged in the immediate preceding quarter, as fee income also improved due to higher commission and brokerage fees. Cumulative 9MFY20 net profit of RM4.94bn is slightly ahead of our and consensus expectations at 80% of full-year estimates. We keep our numbers unchanged however as we err on the side of caution. Earnings growth momentum appears to be on the mend though pockets of weakness may hamper near-term prospects amid volatile operating conditions. Our Neutral call is kept though with a higher target price of RM8.00 (RM7.20 previously) as we make slight changes to dividend payout assumptions on account of lower risk premiums.

• Net fund based income for 9MFY20 is down 5.3% YoY to RM12.31bn, the drop a result of net modification losses and margin compressions due to the various Overnight Policy rate cuts this year, though the latter was mitigated somewhat by the Group’s strong CASA growth (+27.4% YoY) momentum (CASA ratio – Sep 2020: 42.1%, Sep 2019: 34.6%) across all its operating geographies and steady credit expansion in Malaysia (+5.2% YoY).

• Net fee based income for 9MFY20 is up a strong +16.9% YoY to RM6.14bn, underpinned by securities disposal gains and revaluation gains on derivatives.

• Loans growth (-0.6% YoY, +0.3% QoQ) is unsurprisingly weak on the back of slowdowns in its key overseas markets (Singapore: -7.8% YoY, Indonesia: - 15.8% YoY). Near-term growth will continue to be supported by Malaysia. § Net interest margin (NIM) fell 19bps to 2.08% YTD 9MFY20, reflecting effects of drastic rate cuts domestically (-125bps), in Singapore (-130bps) and Indonesia (-100bps), as well as the net modification loss, the latter alone constituting 5bps. Management is maintaining its full-year NIM compression guidance of 20bps, though on assumption there are no further rate cuts.

• Asset quality concerns will continue to dominate in the coming quarters. 9MFY20 provisioning charges of RM3.6bn, up a notable 76% YoY now includes, 1) RM580m (from RM500m in 1HFY20) in additional provisioning on macro-economic variable (MEV) adjustments, and 2) RM1.5bn (from RM1.0bn in 1HFY20) in management overlays, in anticipation of heightened loan delinquencies upon expiry of relief measures by mid-2021. Loan loss coverage is a healthier 106.8% (2QFY20: 99.2%), inclusive of regulatory reserves. On an encouraging note, gross impaired loans are trending lower on slower formation of newly-impaired loans, though helped somewhat by write-offs. Credit charge-off rate is expected to range between 75bps and 100bps this year (9MFY20: 89bps), and remain elevated in 2021 however.

Source: PublicInvest Research - 30 Nov 2020