9MFY20 results came in line with both ours and market expectations, supported by strong fund and fee-based incomes. Top-line continued to show resilience sequentially, underpinned by resilient NOII with credit charge looking normalised. Given the challenges ahead, we ascribed to a lower PBV of 0.7x, lowering our TP to RM4.20. Still valuations are undemanding and with attractive dividend yield of 6%, we maintain OUTPERFORM.

In line. 9MFY20 CNP of RM1.09b came in line at 73%/76% of our/market full-year estimates. No dividend declared as expected.

Strong top-line. YoY, CNP saw a +4% uptick, on the back of strong top-line growth (+10% to RM3.2b) on account of stellar NII and NOII of +11% and +17%, respectively. NII surged on account of better loans (+4.2% and within guidance) mitigated by flattish NIM. CIR were well contained despite higher opex (+5%) falling 2ppt to 50% (within guidance). Asset quality saw an uptick as GIL rose +8bps to 1.71% coming from manufacturing and hospitality. Credit charge was at 0.17% vs a credit recovery of 4bps attributed to higher impaired loans formation (+10%).

QoQ rebounded. CNP of RM382m rebounded, seeing a +20% uptick as impairment allowances fell 36% to RM68m. Top-line of +2% were underpinned by both NII and NOII at +7% and +6%, respectively. NII was underpinned by higher loans (+2.5%) and NIM expansion of 11bps (as deposits were re-priced and on easing of deposits). Asset quality improves as GIL fell 6bps to 1.71% and credit charge fell 16bps to 0.26% easing to its normalised level of ~20bps

FY20E target maintained. Management guided for an unchanged ROE of 8-8.5% (in line with our estimates) with loans expected to end at 4% for FY20 (in tandem with GDP level). NIM is expected at current YTD level with another rate cut expected to shave off RM30-50m of NII. Impact of COVID-19 is still uncertain although portfolio exposure is estimated at ~RM12b.

Earnings maintained. No change to FY20E earnings of RM1.5b as results came in-line, based on these assumptions; (i) NIM at +4bps (unchanged) from FY19 level of 1.89%, ((ii) CIR of 50% (unchanged), (iii) loans growth at +4.5% (unchanged), (iv) credit costs at 15bps (unchanged), and (v) tax rate of 21% as guided by management.

TP lowered but call maintained. We slash our TP to RM4.20 (from RM4.75) as we ascribe to a lower FY21E PBV of 0.68x (previously 0.77x) implying a 0.5SD below mean to reflect challenges ahead. On undemanding valuations with attractive dividend yield of 6% coupled with total potential upside of >+15%, we maintain our OUTPERFORM call.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans & deposits growth, (iii) worse-than-expected deterioration in asset quality, and (iv) higher-than-expected rise in credit charge.

Source: Kenanga Research - 28 Feb 2020