Results in line, with earnings underpinned by strong loans and normalized NIM. Asset quality remains strong as ever coupled with a resilient BOCD. Moving forward, we roll over our valuation to FY21E PBV, subscribing to higher PBV (5-year mean) – TP raised to RM18.90 with an upgraded call to OUTPERFORM.

In line. 1QFY20 CNP of RM689m is in line, accounting for both our/market estimates each at 25%. No dividend declared as expected.

Resilient BOCD. YoY, CNP of RM686m improved 8% on account of stripping out RM72m in divestment gain (in 1QFY19). Excluding this one-off gain, top-line improved 3% to RM1,215m underpinned by Islamic Banking (+17%, with financing at +16%) as NOII fell 18% to RM311m. NOII fell due to: (i) the absence of the RM72m divestment gain, (ii) decline in forex (-67% to RM11.6m), and (iii) unrealised loss of RM72m. Its 18% associate BOCD continued to be resilient contributing 19% of PBT despite PAT contribution falling 1% - this period is the weakest quarter for BOCD (YoY, BOCD 9M19 PAT growth at +18% with loans growth at +28%). NIM improved by 7bps on account of repricing of deposits, mostly coming in 4QFY19 and 1QFY20. Loans growth at +6.8% (above guidance/estimation of +6%) driven by residential properties (+10.2%) and SMEs (+8.9%). Asset quality continued to be healthy at 0.81% (2nd after PBBANK) with a credit recovery of 3bps (due to bad debt recoveries of RM53m).

QoQ, CNP surged 8% on account of strong top-line growth of 4%, underpinned by NII and Islamic Income growth at +5.4% and +14.2%, respectively. Both benefitted from re-pricing of deposits as NIM surged 14bps. NOII fell due to unrealised loss of RM72m and decline in forex gain by 59% to only RM11m. Slight uptick in asset quality seen as GIL went up by 3bps to 0.81%. While loans moderated by 220bps to 0.8%, we are encouraged by its resilience in residential properties (+10bps to 2.4%) and PF (+220bps to 4.0%). As expected, moderation in loans was due to decline in working capital (-4%). BOCD’s contribution continued to be steady, up by 2%.

BOCD looking resilient. No change in management’s guidance with outlook to be driven by healthy loans (+5-6%), and NIM expected to improve above 2%. Loans will be driven by retail, mortgages, SMEs and PF. NIMs look likely to improve with deposits intake likely to be subdued with the low LDR (84%). Given that with more focus on unsecured retail and provisioning likely to be higher, management guided for a credit charge of 10-12bps. We believe that BOCD will still play major part in the Group’s growth given that its LDR of 57% provides plenty of room for growth with NII the main driver. Note that 73% of its loans are from corporates and SMEs with the added positive of BOCD focused more on its domestic region.

Earnings maintained. No change in FY20E/FY21E earnings at RM2.7b/RM2.8b based on these unchanged conservative assumptions; (i) loans growth at+5.6%/6%, (ii) CIR at 43% for both FYs, (iii) NIM at - 4bps/-3bps, (iv) credit charge at 9%/13bps, and (v) BOCD growth of ~7% for both FYs.

TP and Call raised. We raised our TP to RM18.90 (from TP RM17.30) as we roll over to FY21E subscribing to its 5-year PBV mean of 1.33x. We felt this is justified as concerns over BOCD are unsubstantiated given its resilience nature (in the on-going trade friction). On strong asset quality with resilient retail loans plus undemanding valuations, we raised it to OUTPERFORM.

The key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, and (iv) weaker-than expected contribution from BOCD.

Source: Kenanga Research - 28 Nov 2019