3M20 results are below market estimates, dragged by compressing NIM and higher provisioning. TP lowered to RM3.45, given the risks ahead from further NIM compression, higher provisioning given the higher intake of PF and SME moving forward. However, as valuations are undemanding, it is maintained at OUTPERFORM.

Disappointing. 3M20 CNP of RM77m fell below our/market estimates accounting for 13% each of both estimates. While top-line was soft, core earnings was dragged by higher opex, impairment allowances and widening NIM compression. No dividend declared as expected.

YoY, 3M20 fell 43% to RM77m. While top-line was soft at +1.5%, decline in earnings was caused by higher impairment allowances (>100% to RM105m) and higher opex (+8% to RM198m) which pushed CIR by +3ppt to 48.7%. Fall in NOII (-12%) dragged top-line as both NII and Islamic banking incomes saw improvement (+2% and +12% respectively). NOII was dragged by MTM revaluation losses of RM17m (vs 1Q19: RM41m gain). Further NIM (reported 3bps) compression dragged NII despite loans at +6% (vs industry at >+4% and guidance/estimation of +7%). Asset quality mixed as GIL saw a 10bps fall to 1.3% but credit charge surged 15bps to 0.53% due to lower credit recoveries (-41% to RM9.7m) and higher provisioning from three single accounts and growing PF space.

QoQ, the new financial year saw broad-base decline with CNP falling 31% dragged by impairment allowances (+114%) with soft top-line (<+1%). Top-line was boosted by strong NOII (+16%) propelled by strong net fee income (+61% to RM40m). With loans falling (-0.1%) and further NIM compression (reported; -10bps due to higher FDs - +13% - intake since Mar/Apr 2019 with longer tenure), NII fell 2.1%. Asset quality deteriorated as GIL saw a 20bps uptick with credit charge up by 14bps to 0.53%

FY20 target looking stretched. Management still maintain its target ROE of >10% for FY20E, driven by; i) loans ~+7%, ii) 5-10bps compression in NIM, iii) CIR of 48%, and (iv) credit cost revised to ~40bps (from~35bps). Loans will be driven by its RAR loans namely; i) Alliance One Account (AOA), ii) PF, and (iii) SME. Mitigating NIM compression will be the driver for higher CASA through targeting 1,800 new payroll companies (vs. FY19: 1,350 companies). We believe these targets are stretched as risks of further NIMs compression are unavoidable given the prospect of further rate cut (with 95% of its FDs maturing in 6-9 months) coupled with risks of higher provisioning given the higher intake of PF and SME.

Earnings revised. Our FY20E/FY21E earnings are revised downwards by 8%/7%, respectively, to RM530m/RM587m. FY20E assumptions are ; i) loans at +6% (from +7), ii) credit costs at 40bps (from 35bps), iii) NIM (at -10bps (from -5bps), iv) CIR of 48% maintained, and v) revised NOII downwards by 23% to RM272m.

TP lowered but call maintained. TP lowered to RM3.45 (from RM4.25) based on a target FY20 PBV of 0.89x (implying a -1.5SD below its 5-year mean) reflecting risks of further NIM compression and higher provisioning from its SME & PF books with prevailing uncertainties. Despite the uninspiring results, dividend yield is exciting at ~6% with recent downturn in price. With potential total returns still >20% we maintain OUTPERFORM.

Risks to our call: (i) lower-than-expected loans growth, (ii) steeper margin squeeze, (iii) higher-than-expected rise in credit charge, and (iv) further slowdown in capital market activities.

Source: Kenanga Research - 28 Aug 2019