Despite 6M19 earnings coming in below expectations (due to higher provisioning), we are optimistic of lower provisions ahead. We however revised earnings downwards due to moderation of its higher yielding PF. TP reduced to RM1.10 with OUTPERFORM call reiterated – given that provisions expected to taper ahead with its NIM level is still the best performer.

Underperformed. 6M19 core net profit (CNP) of RM190m is below our/market estimates accounting for 33%/31% of our/market estimates. The negative deviation was due to higher provisioning (RM245m) for the period under review, but is expected to taper off in the coming quarters. No dividend declared as expected.

Top-line marginally lower mitigated by improving NOII. YoY, 6M19 earnings fell (-52%) due to higher provisions (vs 6M19: write-back of RM32m). As guided previously, the provisioning came mostly from its Personal Finance space (due to civil servants retiring/leaving). Top-line was flat, dragged by fund-based income (-8% to RM629m) on account of compressing NIM (as expected by 30bps to 2.8%) due to lower higher yielding financing (from PF; falling -9%). On a positive note, although loans/financing were below guidance (+2% vs +6%), corporate financing surged +12% compensating for the fall in PF. NOII improved >+100% to RM72m due to higher investments in the treasury markets (+100% to RM9b). No significant change in its GIL at 5.6% (or 2.05b) of which RM1b are conventionally impaired loans (at company level) which MBSB expects to clear by 2020. Due to higher provisioning, credit charge was at 1.37% (vs 6M18: 17bps credit recovery).

QoQ, CNP improved +27% to RM106m on account of lower provisioning (-40% to RM92m; as guided by management on tapering provisioning).Top-line decline (-8% to RM336m) was drag by fund based income falling 5% on account of NIM compression (23bps) despite loans/financing at +2% (up by 140bps qoq). Loans/financing continued its uptrend led by corporates rebounding +19%. Slight uptick in GIL (+30bps) to 5.6% but credit charge fell 70bps to 1.03%.

Corporate loans to sustain ahead. Despite its financing growth being off target, we are positive on its corporate loan’s/financing growth (on track with management’s target of 30/70 corporate/household by 2020 from 1H19: 27/73). Financing disbursement in 2Q was at RM4.1b, (73%) coming from Business Banking with another RM1.2b (from its unutilized stock of RM5.4b) expected in 3Q. We are not unduly concerned with its compressing NIM as it is expected given the rebalancing of its loan portfolio. Liquidity and NIM will be supported by its investments in the debt market (which we understand carry an average yield of 3.9% - lower than its FD rate However, its NIM level is still the best among the banking stocks in our universe. Provisioning are expected to taper off in the coming quarters; thus, management maintained its guidance of 50bps (vs our estimate of 73bps).

Post results, our FY19E/20E are revised downwards at (-8%/9%) on moderation on its higher yields portfolio to RM528b/574b; (i) NIM at 2.9%/2.8% (from 3.0%/2.9%), (ii) loans growth at ~+4% for both FYs (unchanged), iii) credit charge at 73bps/60bps (unchanged) and (iv) operating income at a conservative RM92m/RM103m (from RM52m/RM53m); as we understand that treasury activities will contribute ~RM30m each in the coming quarters.

TP revised but Call maintained. TP lowered to RM1.10 (from RM1.15) based on an unchanged) target PBV of 0.9x - implying a 0.5SD below the mean to reflect risk of corporate loans undermined from economic slowdown. Th stock price has been battered in recent weeks; thus valuations undemanding with excellent dividend yield of +~6%. Given that provisioning is seen tapering off coupled with still elevated NIM, we reiterate OUTPERFORM.

Source: Kenanga Research - 3 Sept 2019