PBK reported solid underlying 3QFY20 numbers, especially headline items above the PIOP line. These, however, were dampened by higher credit cost relating to pre-emptive loan provisions. PBK’s revised FY20 credit cost guidance of 30- 35bps (from 20-25bps) may raise eyebrows given its already solid asset quality (GIL ratio of just 0.3%), but this is mainly for pre-emptive provisions that can be absorbed comfortably given the strong results. More importantly, this provisional front-loading paves the way for a stronger recovery in FY21 and sees us lift FY21E PATMI by 6%. Maintain OUTPERFORM with revised TP of RM20.25 (from RM18.00).

In line. PBK reported 3QFY20 PATMI of RM1.39b (+2% YoY/+39% QoQ), which brought 9MFY20 net profit to RM3.7b (-9% YoY) or 81% each of our and consensus FY20E PATMI. While this appears to be a good beat on stronger-than-expected pre-impairment operating profit (PIOP), management’s revised credit cost guidance of 30-35bps (from 20-25bps) means we keep our FY20E bottom-line relatively unchanged. As expected, no dividend was declared.

Results’ review. Stripping out the Day One modification losses of RM498m in 2QFY20, 3QFY20 PBT would have been up a marginal 1% QoQ with stronger PIOP (+11% QoQ/+18% YoY), largely offset by higher loan impairments (+118% QoQ/+580% YoY). Generally, 3QFY20’s underlying trends were positive, in our view, with highlights being: (i) pick-up in loan growth (+2% QoQ/+5% YoY) thanks to consumer and SME, (ii) estimated +6bps QoQ NIM expansion with the 41bps QoQ decline in funding cost more than compensating for the 31bps decline in asset yield, (iii) stronger NoII (+11% QoQ/+39% YoY) on both markets-related (unit trust, brokerage) and core fee (improved activities) income, (iv) good cost discipline. Hence, CIR was just at 31% vs 33.5% and 34.5% in 2QFY20 and 3QFY19, respectively, and (v) further improvement in asset quality.

As mentioned above, the stronger PIOP was dampened by higher credit cost of 40bps (2QFY20: 18bps; 3QFY19: 6bps). We note that PBK booked in provisions amounting to RM336m (vs. 3QFY20 total net loan impairments of RM335m) during the quarter that relates to changes in model/risk parameters, mainly for Stage 1 and Stage 2 loans. We believe these provisions are pre-emptive in nature. With GIL down 16% QoQ thanks to the moratorium (GIL ratio of just 0.3%), LLC jumped to 209% vs 2QFY20: 159% (3QFY19: 118%). Finally, group CET-1 ratio was a solid 13.6% while 9MFY20 annualised ROE (including modification losses) of 11% is tracking the “double-digit” guidance.

Conference call highlights. PBK explained that the revised credit cost guidance is to prudently book in pre-emptive provisions upfront given that asset quality outlook is still uncertain (recent Covid-19 wave and MCO, etc) and emphasised that this is not in relation to any specific asset quality issues. While this implies 4QFY20 loan impairments could be as large as 9MFY20, we estimate this would be sufficient to lift reserves to the extent that LLC (ex-regulatory reserves) would still be 100% even if GIL ratio rises to 0.8-0.9%. Meanwhile, PBK raise its FY20 loan growth target to >4% (from 3-4%) while 4QFY20 NIM is expected to be slightly better sequentially. Finally, PBK shared that the take-up rate for the targeted repayment assistance programme stood at 9% (1% under moratorium and 8% on reduced monthly repayments) with the individual:businesses proportion at 60:40. B40 makes up 12% of total retail customers or 8% of loan base, but management does not expect the entire portion to require assistance. Also, some of these borrowers could already be under the existing repayment assistance programme. Finally, PBK could not comment much on dividends at this juncture as it would depend on the operating environment ahead and regulator’s approval.

FY20E PATMI relatively unchanged, as our revised loan growth assumption of 4% (from 2%) and some fine-tuning offset our revised FY20E credit cost of 32bps (from 27bps). Correspondingly, we lowered FY21E credit cost to 18bps (from 22bps) and together with a revised FY21E loan growth of 4% (from 3%), we raised FY21E PATMI by 6%.

OUTPERFORM maintained with revised TP of RM20.25 (from RM18.00). Our GGM-derived target FY21E PBV has been raised to 1.60x from 1.44x after we incorporate the following revisions: (i) risk-free rate assumption of 2.7% (from 3.0%); and (ii) 25bps reduction in market risk premium assumption to reflect recent vaccine development for Covid-19.

Key risks to our earnings estimates are: (i) higher-than-expected margin squeeze, (ii) softer-than-expected loans growth, (iii) lower-than-expected fee-based income, and (iv) spike in credit cost.

Source: Kenanga Research - 30 Nov 2020