Following a conference call with management yesterday, we believe FY20E provisions will be higher given the current negative macro-economic landscape translating to a much higher credit charge. However, with macro-economic variables expected to improve by end-2020 and 2021, it is likely credit charge will be lower then and so will provisions for FY21E. Nevertheless, we expect flattish to single-digit loans growth for FY21E. Moving forward, we revise FY20E/FY21E earnings lower by 14%/6% with TP reduced to RM2.05. Maintain OUTPERFORM given its attractive dividend yield of ~7%.

Modification loss might be muted. Management expects modification loss to be incurred on fixed rate loans – in particular on hire purchases - due to the moratorium.. While 80% of its loan book (individuals & SMEs) are eligible for the moratorium, the current take-up rate of 80% may decline ahead as customers become aware of the extra charge incurred on top of the outstanding interest at the end of the moratorium. Nevertheless this modification loss will likely be muted given that HP makes up less than 2% of its loan book. Liquidity is manageable as LCR is at >100%. Assuming 80% opt-in, cash flow affected will be roughly RM400m/month (likely reduced as the number to opt-in is likely to be lower). However, Cash-in-hand and Financial Instruments availability are to the tune of RM1.8b, sustainable for the 6- month moratorium period.

Feb-March asset quality saw slight uptick in delinquency which is normal given new loans coming in (Dec 2019: GIL at 1.86% - bulk coming from its AOA mortgage account). None of the loans under moratorium will be classified as impaired loans during the six months. Nevertheless, we do not discount the delinquency ticking up post moratorium depending on the pace of economic recovery at end of 2020. Post moratorium, borrowers who continue facing difficulties can apply to be classified as R&R by 8 Dec 2020 and the bank will be selective to allow R&R loans for deserving borrowers. For FY20, credit charge will likely be higher than previously guided (50-60bps). This is based on the ever-changing macro-economic landscape which will see higher provisions in 4QCY20 putting upside pressure on credit charge. However, we believe if the economy recovers in tandem with global economy by Dec 20/2021, then we can expect a lower credit charge for FY21.

FY21 loans target not visible. Loans growth has been slow with April a lost month devoid of loans growth. But there are some RM300m RM350m approved mortgage loans (mostly from AOA account) waiting to be disbursed (0.8% of outstanding loans in Dec 2019). We believe SME loans will pick up post MCO. While there is still demand, some loans application could not be approved currently as these require customer engagements that is not possible under MCO.

Earnings revised. We slashed our FY20E/21E earnings by 14%/6% to RM379m/431m on the premise of muted loans and higher credit charge. However, we expect rebound for FY21 on lower provisions and hence lower credit charge. Our assumptions; (i) loans growth at +1.6%/1.2% from (+2.1/+2.7%), (ii) credit charge at 66bps/55bps (previously at 47bps/56bps), (iii) NIM at 12bps/7bps compression (unchanged), and (iv) ROE at +6.5%/7.1% (previously +7.6%/+7.5%). Our TP is reduced to RM2.05 (from RM2.2) pegged to a FY21E PBV target of 0.52x (previously 0.57x) - implying 2.8SD below mean which is justified as our revised FY21E ROE of 7.1% is at an implied 2.8SD below mean. Given its attractive dividend yield of ~7%, we maintain our OUTPERFORM rating.

Source: Kenanga Research - 30 Apr 2020