1HFY21 results came broadly in line with both NIM and credit charge within expectations. Despite positive vaccine developments, outlook is still cautious; thus, elevated credit charge guidance remains. While we reiterate MARKET PERFORM, TP is raised to RM2.70 on higher valuations.

Broadly in line. 1HFY21 CNP of RM208m accounts for 58%/53% of ours/consensus estimates. We still deem the results as in line as the positive deviation from our estimates were due to stronger-than-expected NoII (+31% YoY,49% QoQ) due to gains from sale of financial assets which is unlikely to be sustainable in the coming quarters. As, expected no dividend declared due to the current economic uncertainties.

YoY, 1HFY21 CNP posted commendable performance (+9%) due to resilient top-line (+7%) of RM896m underpinned by a strong NOII (RM212m) on account of gain from sale of financial assets (RM182m vs 1H20: RM36m). NII and Islamic Banking showed stable performance (+1.7% and +1.4%, respectively) on account of stable loans (+1.2%) and lower funding costs from better deposit mix as CASA improved by 4ppt to 41%. Loans and Financing were driven by Consumer (+2.5%) and SME (+7% or RM0.7b, benefitting from Government Assistance Schemes). NIM came under pressure due to cuts from OPR mitigated by better deposits mix and higher yielding assets mix. Credit charge surged to 113bps (vs c.100bps guidance) - excluding management overlay charge, it would be at 16+bps. GIL was stable at 1.7%. Lower operating expenses (-4%) coupled with better top-line saw CIR improving by over5ppt to 42%.

QoQ, CNP was fairly stable at RM104m with the strong uptick in top-line (+12%) to RM474m largely offset by higher impairment allowances (+58%) or 138bps credit charge due entirely to management overlay. Top-line was bolstered by NOII (+49% to RM127m with a RM99m gain from sale of financial assets – the highest in the past 10-year history). NIM improved slightly on account of better deposit mix that more than offset the OPR cut in July. Despite higher opex (+2%), CIR improved +4ppt to 40% due to stronger top-line growth. On a positive note GIL improved by 20bps to 1.7%.

Briefing highlights. Management is still cautious ahead despite the latest vaccine development, with sectors such as tourism and hospitality likely to be more vulnerable. As such, the credit charge guidance of c.100bps for FY21 is unchanged. RM5b of loans (or 12% of gross loans) have opted for the targeted assistance programme with 42% of this under the extended moratorium. So far, there has been no significant uptick in takeup for the Payment Relief Assistance (PRA) (including the expanded programme to the B40 segment) since Oct, but much will still depend on the impact of the current CMCO period. Loans growth target of +2% looks achievable coming from SME, AOA and PF segments, which provide better yields. There could be upside risk to credit charge given that management assumed 50% of AOA will turn NPL in FY22, thus the decision to bring forward some provisioning in FY21. Although CET1 and Capital Ratios are robust at 15% and 21% respectively, Final Dividend declared will depend on asset quality as management is focussed on ensuring ample liquidity and capital.

Post-results, we make no changes to our FY21E/22E earnings.

Valuation revised. We revised our TP to RM2.70 (from RM2.20) based on a GGM-derived CY21E PBV of 0.65x (from 0.55x) as we pencilled in a 30bps cut in risk-free rate to 2.7%. The huge SRF granted (c.RM627m) is adequate to compensate its modification losses. Reiterate MARKET PERFORM.

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

Source: Kenanga Research - 30 Nov 2020