Stellar FY19 posted as write-backs boosted earnings. We believe that provisioning are looking to taper ahead and hence raise our FY20E earnings by 29%. We however lower our FY20E PBV to 0.85x (from 0.9x) to arrive at the TP of RM1.10 - implying a 0.5SD below the mean to reflect risk of loans undermined by economic and political uncertainties ahead. Our valuations are undemanding coupled with potential dividend yield of ~8% (assuming it still maintain its dividend payout of 49%). OUTPERFORM call reiterated.

Above expectations. FY19 CNP of RM717m exceeded expectations accounting for 136%/141% of our/market estimates. The positive deviation was due to lower credit charge; at 33bps vs expectations of 73bps. The lower credit charge was due to write-backs from both corporate and retail spaces. No dividend was declared.

Writebacks boosting earnings. YoY, CNP registered +12% on account of: (i) lower impairment allowances (-1%) to RM114m, better cost discipline with CIR at 28%, and (ii) tax rate falling 3ppt to 20%. Top-line was at RM1.41b (+3%) as Islamic banking income grew 3% to RM1.15b with NII falling 22% (as conventional banking operations tapered). NOII gain 2-fold due to RM58m sale of investment assets. As seen in FY18, impairment allowances were marginally lower due to RM211m write-backs in the 4Q (broad-based, coming from both retail and corporate). Management also alluded to improved micro-economic assessment leading to a more realistic underwriting. Loans/Financing was below guidance at +2% due to a strategizing of its Personal Finance (PF) portfolio to more middle/higher income individuals. NIM fell 20bps as expected as its PF was rebalanced to 50/50 fixed/variable. Slight improvement in GIL which fell 30bps to 5.2% (or RM1.87b) of which RM1b is conventionally impaired loans (at company level) which MBSB expects to clear by 2020. Credit charge improved slightly by 1bps to 0.32% due to write-backs RM211m vs. FY18 of RM154m.

QoQ, CNP jumped 2-fold to RM357m as the write-backs boosted earnings. Top-line improved 7% to RM368m underpinned by strong Islamic income (+10%) to RM318m as conventional operations tapered. Loans/Financing fell 2% as its PF portfolio was rebalanced. NIM improved QoQ by 14bps due to better asset repricing (from PF/Corporates and treasury),

NIM and credit charge to normalise ahead. We are positive on outlook ahead, given the strategizing of its PF portfolio. Corporate/retail mix is currently at 27/73 and on track for a 30/70 mix. Financial investments have grown 2-fold to RM11.2b leading to a +40% profit in treasury activities to RM479m. While NIM will retreat to a normalised level ahead (by FY21 at least due to lower retail financing) we are positive that its credit charge costs will retreat to a normalised level (which management guided for a conservative 30-50bps (coming from better assessment of better quality PF portfolio).

Earnings revised upwards. Moving ahead, we revise upwards our FY20E earnings by 29% to RM742m and introduce our FY21E where expect a slight dip in performance due to tapering of NIM. Our assumptions for FY20E/FY21E; (i) loans growth at conservative ~+3%/~4% (vs management’s target of 6-7%, ii) NIM at 2.8%/2.7%, (ii) credit charge at 34/30bps, and (iii) operating income at a conservative RM120m/RM134m.

TP and Call maintained. TP maintained at RM1.10 based on an unchanged) target PBV of 0.85x (from 0.9x) - implying a 0.5SD below the mean to reflect risk of loans undermined from economic and political uncertainties ahead. The stock price has been battered in recent months; valuations are now undemanding with excellent dividend yield of +~8%. Given that provisioning is seen tapering off coupled with still resilient NIM, we maintain OUTPERFORM

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans & deposits, and (iii) worse than-expected deterioration in asset quality

Source: Kenanga Research - 2 Mar 2020