Following a conference call with management last Friday, we reduce our FY21E earnings by 22% after raising our assumption on credit charge while cutting NIMs. The strategy to focus on higher yielding assets has a double edge; mitigating NIM compression but at the same time necessitating a higher credit charge. Reduce TP to RM2.20 with call downgraded to MP. Recap. FY20 CNP of RM424m was 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 (+25% YoY) which was bolstered by higher gains/revaluation of financial investments (RM109m or 33% contribution to NOII).

Cautious stance. Management is taking a cautious stance for FY21 given the uncertainties ahead. Loans growth is expected to be at ~2% YoY with opex expected to be flattish. Taking a view of an economic recovery by end of 2020, credit charge is expected to stay elevated (~100bps) with further downside pressure on NIM.

Higher yielding portfolios. Although management guided for moderate FY21E loans growth (>+2% YoY), risks are abound given the continued focus on SME, AOA (Alliance One Account) and Personal Loans (PF) which are less secured but offer higher yields. At the same time SME loans offers the opportunity to maintain high CASA ratios (FY20: ~37%) via its Alliance@Work (FY20: +26% YoY). Higher yields coupled with low funding costs will mitigate the downside pressure on NIM. On a positive note, asset quality have been stable for these three segments in the last three quarters with credit costs trending down, due to: (i) intensified collection efforts, (ii) tightening credit origination policy, and (iii) prioritising customer calls/visits. That said, the rise in delinquency in these segments (in 4QFY20) was due to borrowers’ anticipation of a moratorium.

Elevated credit charge. As highlighted above, management guided for FY21E credit charge to rise further to 100bps (FY20: 64bps) – a negative surprise as we had expected a much lower number. Management sees a U-shape economic recovery, (economy recovering by end of 2020), necessitating the 100bps credit charge. To minimise further deterioration, exposures to vulnerable sectors (i.e. Tourism, Aviation) will be reduced with emphasis on sectors that are more resilient, such as Pharma and Food.

NIM compression unavoidable. Further NIM compression is unavoidable given the 100bps OPR cut in early 1HCY20, which is expected to reduce NIM by 18bps for FY21. Furthermore, net impact from modification loss is expected to reduce NIM further by 4bps. In minimising this impact, emphasis will be on: (i) segments that offer higher yields, (ii) growing low cost funding, (iii) using MGS and MGII to meet Statutory Reserve Requirement (SRR), which will add an additional +3bps, and (iv) realising gains from its fixed income portfolio (FY20 gain: RM26m or 5bps).

Earnings revised. Our FY21E net profit is revised down by 22% to RM337m due to the factors mentioned above. Our assumptions are: (i) loans ~+2% (from +1.2%), (ii) credit charge at 90bps (from 55bps), and (iii) NIM compression at 20bps (from 7bps). We believe its NOII will be fairly resilient given the potential gains/sale of its revaluation reserve of RM330m. We believe that management will resume dividends for FY21 (given their view of economic recovery in 2021) and thus we impute a 48% dividend payout (average for the last three years) giving a DPS of 10.0 sen. We also introduce our FY22E, where we expect a rebound benefitting from lower credit charge and stable NIM. TP is reduced to RM2.20 (from RM2.60) based on a GGM-derived CY21E PBV of 0.55x (from 0.66x). Downgrade to MARKET PERFORM, given elevated credit charge and downside on NIM pressure.

Source: Kenanga Research - 29 Jun 2020