3M19 earnings came below expectations as impairment allowances surged unexpectedly. However, recoveries are expected in the coming quarters which will normalize credit costs. Financing growth is still abysmal but operating income surged on new products and services introduced. Maintained TP of RM1.15 as we roll over our valuation base to FY20E. Still, valuations are undemanding; hence, OUTPERFORM maintained.

Underperformed. 3M19 core net profit (CNP) of RM84 is below our/market estimates accounting for 13% each of both estimates. The negative deviation was due to the absence of write-back (recall that 3M18 saw a huge writeback of RM155.4m due to prudent provisioning in FY17 in preparation for MFRS9).

YoY, 3M19 earnings fell 74% to RM84m due to the absence of large scale write-backs resulting in a higher impairment allowances of RM153m. Stripping that aside, top-line was commendable, improving by 5% as its Islamic banking continued to show traction at +5% to RM270m with investment from securities generating 8% of total contribution in investment of depositors’ funds & Islamic capital funds. Other operating income saw commendable income of RM42m (vs 3M18: RM13m) mostly coming from fixed and forex income activities. Loans & Financing growth was a disappointment (at <1% vs expectation/target of 4%/6%, while NFM fell 5bps to <3% as guided). Asset quality deteriorated YoY as GIL saw an uptick of 50bps to 5.3% with credit costs at 173bps vs a credit recovery of 178bps in 1Q18.

QoQ, CNP fell 28% due to higher impairment allowances of RM153m vs RM87m in the previous quarter. Top-line improved by 11% despite Islamic banking income falling 5%, mitigated by strong net interest income and operating income (gaining by RM23m and RM30m, respectively). Islamic banking income fell due to loss of income attributable to Sukuk (RM24m vs gain of RM111m in 1Q18). The quarter saw an improvement in asset quality as GIL fell 20bps to 5.3% coming from construction segment (falling by 50bps to 1.8%).

Still bullish. Despite its loans/financing growth being off target, management guided for 6% growth as MBSB rolls out new businesses such as Corporate & Retail internet banking, Cash Recycling and Trade Finance while reducing Personal Financing. We are cautious on this target as corporate loan is one of its drivers with the prevailing economic uncertainties. However, management is still optimistic on the corporate front as this segment saw a 4%/1% QoQ/YoY growth. Further NIM compression is expected to persist into 2019 due to: (i) competition for corporate financing, and (ii) decline in higher-yielding personal financing (PF) but we expect NIM to hover around 3%. Management also maintained its 50bps guidance in credit costs for FY19 as it expects recoveries coming from both retail and corporate in the coming quarters.

Post results, we slashed our FY19E/FY20E earnings by 8%/4% to RM574m/632 on account of higher credit cost (+23/+13bps respectively to 0.73%/0.63%). Other revisions are: (i) loans growth at +4% each for FY19E/FY20E (previously +4%/+5%), and (ii) operating income to a conservative RM92m/RM103m (from RM52m/RM53m); as we understand that treasury activities will contribute ~RM30m each in the coming quarters. TP and Call maintained. With the cut in FY20E earnings TP maintained at RM1.15 (maintaining a target PBV of 0.9x; implying a 1SD below the mean) to reflect our reservation on its loan growth ahead and uncertainties on its writeback/recoveries. However, as valuation is still undemanding, we maintain OUTPERFORM rating.

Source: Kenanga Research - 16 May 2019