The Group reported a sequentially weaker 4QFY20 net profit of RM1.54bn (-37.2% YoY, -21.3% QoQ) owing to elevated provision levels. FY20 net profit of RM6.48bn (-20.9% YoY) is within our and consensus expectations at 105% and 101% of full year numbers however. Income was unsurprisingly affected by pandemic-related challenges (margin compressions, tepid credit demand), while asset quality also took a hit. Cost management and funding-related initiatives stands the Group in strong stead to capitalize on earnings recovery momentum. FY21/FY22 net profit is adjusted by -0.5%/+3.2% due to housekeeping changes. While near-term prospects of the Group may continue to be weighed by pockets of asset quality concerns, we reckon the worst may likely be over. Our Neutral call is kept though with a higher target price of RM8.80 (RM8.00 previously) as we make changes to growth assumptions in our dividend-discount model.

• Net fund based income for FY20 was down 4.9% YoY to RM16.65bn due to a 14bps margin compression on multiple rate cuts last year, and a 3bps (~RM220m) hit due to net modification losses. Further weakness was mitigated by improvements in the Group’s funding profile with strong CASA growth (+23.5% YoY) across all its operating geographies. Net interest margin is expected to remain flat YoY (~2.1%) in 2021.

• Net fee based income for FY20 was higher by +12.3% YoY to RM8.11bn, as the Group liquidated some of its bond holdings to capitalize on the low yield environment, which has also led to significant marked-to-market revaluation gains on its derivatives. Going forward, the Group is looking at leveraging on fee-based income opportunities in wealth management, global markets, investment banking, asset management and insurance.

• Loans growth (-0.6% YoY, +0.3% QoQ) on a Group-wide basis was tepid, weighed by slowdowns in Singapore (-1.9% YoY) and Indonesia (-14.8% YoY) which negated encouraging momentum in Malaysia (+4.0% YoY).

• Asset quality will remain a priority given uncertainties over economic recovery in some of its key markets. Credit charge-off rate is expected to ease off in 2021, though between the 70bps and 80bps level. While provisions doubled this year to RM4.6bn, 50% of this is attributed to macro-economic variable (MEV) adjustments and management overlays for vulnerable borrowers, which could very well be written back should economic conditions improve sooner than-expected. Loan loss coverage remains healthy at 106.3% (3QFY20: 106.8%), inclusive of regulatory reserves. Gross impaired loans are also trending lower.

Source: PublicInvest Research - 26 Feb 2021