1QFY21 core PATAMI of RM1.30b (+156%) is above expectations, led by stronger-than-expected results from derivatives. We do not expect such numbers to consecutively repeat but believe market sentiment will be drawn to its regional recovery plays. The group should also benefit from the eventual market-wide recovery given its leading position. Upgrade to MP (from UP) with a higher TP of RM4.00 (from RM3.50) as we raise earnings forecasts and GGM- derived valuations.

1QFY21 exceed expectations. 1QFY21 PATAMI of RM1.30b was above expectations, accounting for 40%/34% of our/consensus expectations. This was due to much stronger-than-expected NOII derivative gains during the quarter. That said, no dividends were declared, as expected.

During the quarter, the group recognised a one-off RM1.16b revaluation gain with regards to TnG Digital. This pertains to the deconsolidation of the group’s stake for an investment by the Ant Group and US-based Bow Wave Capital.

YoY, inclusive of a one-off RM1.16b revaluation gain from TnG Digital, 1QFY21 total income for the group registered at RM5.95b (+44%). NII increased by 7%, stemmed by both a higher loans portfolio (+3%) and improvement in NIMs (2.53%, +3 bps). Meanwhile, NOII came in 54% stronger mainly thanks to the said derivative gains. The higher top-line suppressed CIR to 48.7% (-7.2ppt) amidst a 1% increase in operating expense. 1QFY21 allowances for impairments were also lower (-26%) due to pre-emptive provisioning in the prior 4QFY20. This lead to a core PATAMI of RM1.30b (+156%). Meanwhile, CASA-to-deposit ratio rose to 43.0% (+5.7ppt) as customers continue seeking easier access to funds. The group’s GIL also steadily declined to 3.4% (-0.1ppt).

QoQ, total income for 1QFY21 (excluding TnG revaluation gain) was only 2% better than 4QFY20, with an uplifted NII from better NIMs (+11 bps), being dragged by a 7% decline in NOII from forex losses. Loan provisions were 51% lesser on the same abovementioned reason. Alongside almost absent allowances on other financial assets, these attributed to 1QFY21 core PATAMI recording a subsequent increase of 506%.

Key briefing’s highlights. Management continues to emphasise on its forward goals to achieve sustainable financial returns by introducing measures to recalibrate operations to strengthen efficiency and asset quality. On its regional focus, Thailand’s commercial exit is on the way with Indonesia and Singapore recalibrating into profitable ventures. In addition, the move to deconsolidate the group’s holdings in TnG could effectively reduce its reported losses and with its backers able to chip in to lower the group’s capital obligations. Management is maintaining their guidance for now but would expect payment reliefs to intensify (currently 13% of gross loans).

Post results, we raise our FY21E/FY22E earnings by 10.3%/6.6% as we revisit our income assumptions, namely for NOII items.

Upgrade to MP (from UP) with a higher TP of RM4.00 (from RM3.50). In addition to our revised earnings, we also increase our GGM-derived PBV valuation to 0.63x FY22E (1.5SD below mean, from 0.60x) as we increase our sustainable ROE multiple for the stock. While we see downside risk for the stock to be limited for now, it still pales in comparison to its large cap contemporaries in terms of ROE, dividends and asset quality to name a few. That said, it could soon reap the rewards of its regional arm’s initiatives for focused approaches and with the return of economic activity spurred by vaccination likely to benefit the larger banks first.

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

Source: Kenanga Research - 1 Jun 2021