3QFY20 saw an earnings rebound given the absence of Modification loss. The stickiness of its Fixed Assets portfolio saw net profit margin improving significantly which is likely to stay elevated going into 2021. We see 4QFY20 to be a challenging quarter on front loading of credit charge and modification losses (albeit moderate compared to 2Q). But these should pave the way for a better FY21. Given an improved outlook next year, we raised TP to RM0.80. Undemanding valuations, reiterate OUTPERFORM.

On track. 9MFY20 saw CNP of RM172m (-52%) due to the Day 1 Modification loss. This exceeded our of FY20E CNP expectation of RM128m (after Modification losses) accounting for 135% of our estimates but we deemed this as broadly tracking expectation on potential modification loss and increase in credit charge in the 4QFY20. No dividend declared as expected as its dividends are declared only in 4Q.

Results’ highlight. Overall 9MFY20 saw improvement in top-line at +29% YoY on broad-based improvement as both fund and fee-based income surged at 18% YoY and 143% YoY (boosted by FVOCI gains of RM193m), respectively., Underpinning the rebound in 3QFY20 to RM258m was the absence of modification loss of RM513m in the 2QFY20. Loans/Financing was flat YoY but as expected for the 9MFY20 period, NPM improved (36bps to 3.1%) YoY as 53% of its Financing/Loans are sticky boosting the gap further as funding costs were re-priced. Credit charge remained elevated but improved by 13bps to 1.07%. Positive Jaw saw CIR falling 3ppt to 24%, signalling prudent management. CET1 ratio was still robust at 19.5% but Loan Loss Coverage (LLC + Regulatory Reserves) fell 3% to 116% but likely to be topped up given its strong capital position.

Sequentially no overall improvement despite the rebound in 3QFY20. Pre-provision profit fell 20% QoQ dragged by top-line (-15% QoQ) and higher non-interest expenses (+8% QoQ). However, Loans/Financing saw uptick at +2% QoQ underpinned by PF (+2% QoQ following the financing of its Program M-Prihatin) and +4% QoQ uptick in its Mortgages (coming from its affordable home programme). Credit charge saw 58bps credit loss (vs a write-back of 61bps) due to macro overlays. There was a slight Modification loss reversal of RM8m (due to longer tenure of some of its fixed assets c.15-17 years).

Briefing’s highlights. Additional Modification loss is expected but not significant for 4Q given the 3-month targeted moratorium. Management guided previously on potentially additional smaller quantum of RM30m- RM50m losses as the moratorium will be extended for selected accounts. While credit charge guidance are unavailable, management warned of further credit charge in 4Q suggesting front loading ahead so as to trigger a potentially a lower provisioning for FY21. We maintain our credit charge assumption c.125bps for FY20, followed by lower credit charge assumption (c.80bps) for FY21.

Post result, FY20E/FY21E earnings left unchanged as we believe our assumptions are conservative enough.

OUTPERFORM maintained with revised TP of RM0.80 (from RM0.70). Our GGM-derived target FY21E PBV has been raised to 0.59x from 0.57x 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 developments. CY21 will see absence of Modification loss as the economic recovery gains momentum in our view which will supplementing the rebound in earnings. Credit charge is likely to be moderate given the front loading with the added advantage of elevated NPM to support top-line. Reiterate OUTPERFORM.

Risks to our call include: (i) new wave of the pandemic (ii) higher-than-expected margin squeeze, (iii) lower-than-expected loans & deposits, (iv) worse-than-expected deterioration in asset quality, and (v) higher than expected modification losses.

Source: Kenanga Research - 1 Dec 2020