While 12MFY20 results came in above our estimates due to better than-expected non-interest income, but NIM and credit charge were within expectations. We feel management will take a cautious stance ahead given the challenging macroeconomic variables, which will give rise to elevated credit charge and further downside on NIM. Maintain OP and TP of RM2.60 pending a management briefing today.

In line. 12MFY20 CNP of RM424m is above/in line with our/consensus expectation, accounting for 112%/97% of our/market estimate. . The positive deviation from our estimate was due to higher-than-expected fee-based income but loans provisioning was in line at RM273m (vs. our estimate of RM283m with loans growth at ~+2% YoY). Surprisingly, no second interim dividend was declared, thus FY20 DPS remained at 6.0 sen (22% payout).

NIM and net credit charge in line. YoY, Despite performing above our estimates, 12MFY20 CNP fell 21% on account of higher impairment losses (+125% to RM314m vs. our estimate of RM334m. Top-line was resilient at RM1.7b (+5% YoY), underpinned by Islamic operations (+5%) and fee-based income (NOII) at +25% to RM331m (vs. our estimate of RM275m) due to higher treasury income/gain and wealth management fees of RM55m offset by loss in brokerage fee and FX sales of RM11m. Loans was at >+2% (vs. our expectation of <2%) driven by consumer and business banking at +3% and +8%, respectively, while corporates fell 3%. NIM as expected fell 10bps to 2.4% (within guidance and estimates) mitigated by lower COF from SavePlus repricing with CASA ratio surging 2ppt to 37%. Net credit charge on loans of 63bps (vs. guidance of 55-60bps) was within our estimate of 66bps. The uptick from guidance due to additional provisioning from weaker macroeconomic variables and higher PF delinquency on consumer in anticipation of the moratorium. GIL surged to 90bps to 2% or RM871m due to uptick from its AOA account (RM201m vs. 4QFY19: RM51m).

QoQ, CNP fell 27% to RM98m dragged by higher impairment allowances (+213% to RM99m) as top-line was resilient despite the initial stage of economic downturn. Resilience was shaped by strong fee-based income (+8%) coming from higher non-client fee-based income (RM7m) and NII (+5%) mostly coming from treasury assets growth (+5%) as loans was flattish. Asset quality improved with conventional mortgage and AOA GIL net inflow slowed in the period under review with both showing inflow of RM5m and RM39m, (vs. 3Q; RM43m and RM72m respectively).

Cautious stance. We understand that management is cautious for FY21 given the uncertainties ahead. Loans growth is expected to be at ~2% YoY with opex expected to be flattish. While credit policies will be tightened ahead, credit charge is expected to stay elevated with further downside pressure on NIM coming from the May OPR cut (25bps cut impacts NIM by 4-5bps). On a positive note, Day 1 Modification loss is expected to be negligible at RM60m with impact on FY21 NII at RM25m adding another 4-5bps erosion in NIM.

Post-results, we make no changes for now pending updates from management’s briefing today (likely with downside biased adjustments).

TP and call maintained. TP maintained at RM2.60, based on a GGM derived PBV of 0.66x ascribed to unchanged FY21E BVPS. Reiterate OUTPERFORM given returns of >10%.

Risks to our call: (i) lower-than-expected loans growth, (ii) steeper margin squeeze, (iii) higher-than-expected rise in credit charge, and (iv) further slowdown in capital market activities.

Source: Kenanga Research - 26 Jun 2020