9MFY19 results came below expectations on account of shrinking loans. TP of RM2.45 and OUTPERFORM call maintained pending a briefing later today. Below expectations. 9MFY19 CNP of RM366m came below our/consensus estimates, accounting for 63%/68% of full-year estimates on account of declining fee-based income as loans shrunk 5% (vs. target of 3-4%). Surprisingly, no dividend was declared for the quarter as historically the Group only declares dividend in 3Q.

Shrinking loans, lower NIM. YoY, 9MFY19 CNP of RM366m improved slightly despite declining top-line as impairment allowances fell 89% to RM9m. Declining top-line (-1.5%) was underpinned by falling NII (-13%) exacerbated by shrinking loans and compressing NIM. NOII improved 11% on account of higher net gains on financial instruments by RM106m. Lower loans (-5%) was on account of portfolio rebalancing. NIM compression (-12bps) was below expectation of -8bps as deposits intensified, OPR cut in May and as higher yielding assets dissipated. Asset quality was mixed with GIL at 3.4% (due to two lumpy accounts expected to be resolved by end of 2019) while a surprise was a lower credit charge of 2bps vs. estimate of 25bps. CIR remained elevated at 64% as shrinking top-line was outpaced by slightly higher opex (+1%).

QoQ, 3QFY19 CNP of RM72m declined 54%, dragged by impairment allowances of RM45m (vs. 2QFY19 write-back of RM26m). Two quarters of sequential growth ended in the quarter as top-line declined 5% on account of broad-based decline. Loans contraction continued for the 4th consecutive quarter (-2.1%) underpinned by SMEs (-5%) and transport vehicles (-4%). NIM compression (-5bps) was not a surprise due to higher funding costs.

Earnings maintained for now pending a management’s briefing with unchanged assumptions for FY19E; (i) loans at ~1%, (ii) 8bps NIM compression, (iii) credit charge at 25bps, and (iv) CIR of 60%. TP and rating maintained. Our TP is maintained at RM2.45 on a target PBV of 0.50x FY20- implying a 0.5SD below mean - to account for the uncertainties ahead and poor ROE of 6 – 7%.

Risks to our call are: (i) higher-than-expected-margin squeeze, (ii) lower-than-expected loans/financing growth as well as (iii) worse-than expected-deterioration in asset quality.

Source: Kenanga Research - 29 Nov 2019