Despite 9M19 earnings coming in below expectations due to higher provisioning, we are confident of lower provisions ahead. No change in our earnings thus TP of RM1.10 and OUTPERFORM call maintained – given that provisions expected to taper ahead.

Underperformed. 9M19 core net profit (CNP) of RM360m is below our/market estimates accounting for 68% of both estimates. The negative deviation was due to higher impairments (RM326m) for the period under review. No dividend declared as expected.

Resilient NIM with fee-based income improving. YoY, 9M19 earnings fell 31% due to the higher impairment allowances – management alluded that the higher allowances was due to recovery failures of a few corporate accounts but are positive that these recoveries will surface in Q4. On a sequentially basis, impairment allowances are tapering as guided by management. Topline was marginally flat as falling NII (-33%) was mitigated by growth in Islamic income (+1.4%) and fee-based income improving (>+100%) to RM87.9m due to higher investment gains in securities (+>100% to RM10.2b). Loans were at +1.8% (below guidance/estimation of ~+4%) but positive improvements from Mortgage and Corporate loans/financing at +10.5% and +1.0% respectively. Not a surprise for PF falling 4% due to strategic initiatives. Conventional and Islamic income was still supported by a resilient NIM at 2.8% (as expected). No significant change in its GIL at 5.6% (or 2.08b) of which RM1b are conventionally impaired loans (at company level) which MBSB expects to clear by 2020. Due to higher impairment allowances, credit charge was at 1.20% (vs 9M18: 0.11%). CIR improved by 4ppts to 27% as opex fell 14% (as >70% of its digital initiatives completed).

Provisioning tapering. QoQ, CNP of RM170m (+60%) improved as impairment allowances and opex fell 13% and 27% respectively with a much lower tax rate of 8% (vs 2Q19: 25%). Topline rebounded to +2% as both conventional and Islamic Income improved at +7% respectively. Loans/Financing moderated to +0.7% dragged by corporates (-7%). On quarterly basis, Q3 recorded lower disbursements by RM736m compared to Q2 as there were lower disbursement for business banking segment. The drop was partially negated by higher disbursement for personal financing portfolio. NIM was still resilient for the quarter due to average funding costs falling (as expensive deposits retired). Credit charge was at 89bps vs 103bps in the preceding quarter.

Corporate loans to sustain ahead. We are positive on its corporate loan’s/financing growth (on track with management’s target of 30/70 corporate/household by 2020 from 9M19: 28/72). Financing disbursement in 3Q was at RM6.3b, (71%) coming from Business Banking with another RM1.4b of unutilized stock (RM4.9b) expected to be disbursed in Q4. Liquidity will be supported by funding from the money market where rates are lower thanks to the recent cut in SRR. At 3.9%, this is a cheaper funding source compared to FDs which helps reduce pressure on NIM. It’s NIM level is still the best among the banking stocks in our universe. Provisioning are expected to taper off in the coming quarter; thus, management expects its guidance of 50- 60bps (vs our estimate of 73bps) to hold.

Post results, no change to our FY19E/20E earnings of RM528b/574b; (i) NIM at 2.9%/2.8%, (ii) loans growth at ~+4% for both FYs, iii) credit charge at 73bps/60bps and (iv) operating income at a conservative RM92m/RM103m.

TP and Call maintained. TP maintained at RM1.10 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. The stock price has been battered in recent weeks; 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 - 21 Nov 2019