1QFY21 net earnings of RM63.4m (+187%) came below expectations as stronger earnings anticipated was chipped by higher-than- expected impairments. The group may be vulnerable to the harsh conditions brought by Covid-19 and seeks to digitalise its capabilities to extend to a wider customer base and possibly boost its fee-based income streams. Pending updates from an analysts’ briefing later today, we maintain our OUTPERFORM call and TP of RM0.720 with downside biased adjustments.

1QFY21 missed. 1QFY21 net profit came in at RM63.4m, which only accounts for 9%/8% of our/consensus estimates. The negative deviation was due to higher-than-expected impairments which dragged earnings. No dividends were declared, as expected.

YoY, 1QFY21 net income from Islamic operations rose by 33% thanks to much lower income attributable to depositors. However, this was offset by modification losses still present in the group’s books. Overall, total income only rose by 7%. Provision for the quarter was softer at RM182m (-35%), where 1QFY20 had previously provided for challenges during the MCO 1.0. While 1QFY20 reported a LATAMI of RM73.3m owing to this, 1QFY21 reported net earnings of RM63.4m (+187%). During the period, CIR came in at 26.3% (-4.0ppt) thanks to the higher top-line met with lower operating expenses (-7%). Meanwhile, the lower impairments also resulted in a lower credit charge of 203 (-109bps). That said, gross impaired financing tipped to 5.8% (from 5.5%) as delinquencies could have arisen from implemented MCO 2.0 in 1QFY21.

QoQ, 1QFY21 total income fell by 13% due to weakness from all income streams. NIMs fell to 3.46% (-19 bps) possibly due to unfavourable re-pricings as gross loans were stagnant. Possibly arising from the abovementioned MCO 2.0, the group applied more prudent overlays to its provisions, raising higher impairments of 56%. This led to the net profit decline of 35% against 4QFY20.

Looking for even ground. The group has plans to utilise technological improvements to expand its outreach, which might allow it access previously inaccessible customer base, such as those in the rural areas. The group hope to achieve solid digital maturity by 2025. Meanwhile, management has been seeking avenues to grow its fee-based income streams to diversify its exposure from financing activity. Similar to its industry peer, a restructuring plan is on its way to reorganise the group as a full-fledged Islamic banking institution.

Post results, we leave our FY21E/FY22E assumptions unchanged for now, pending updates from management in the analysts’ briefing. With that, we put our current OUTPERFORM call and TP of RM0.720 under review with downside biased adjustments. Our TP is based on a rolled over FY22E GGM- derived PBV of 0.49x (1.5SD below 5-year mean).

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower- than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 28 May 2021