1QFY22 core PATAMI of RM386.6m (+6% YoY) is above our expectations on better overall performance. Management remains cautious of short-term pressures but optimistic of its long-term trajectory on hopes of an eventual reopening of the economy.Maintain MP but raise our GGM-derived PBV TP to RM3.20 (from RM2.85) on higher ROE expectations and upgrade to FY23E earnings.

1QFY22 better-than-expected. 1QFY22 PATAMI of RM386.6m beat our expectations (32% of our full-year estimate) but within consensus (30%). The positive deviation is in lieu of better overall performance but mainly on the cost front in which we were more conservative. No dividends were declared, as expected.

YoY, 1QFY22 total income increased to RM1.21b (+13%) stemming from a stronger NII (+36%) performance led by a solid NIMs expansion (+51bps to 2.09%) and 8% loans growth. This was mitigated by softer NOII (-19%) on weaker comparative treasury performance. Aside from better revenues, operating costs also fell with more prudent cost management efforts, bringing CIR down to 40.8% (-9.6ppt). However, against 1QFY21 credit cost was much higher at 66 bps (+41bps) as the group adopted a more pre-emptive stance in its impairment allowances (+298%). Overall, this translates to a PATAMI growth of 6% at RM386.6m.

QoQ, 1QFY22 total income was 8% higher from better results in both NII (+10%) and NOII (+4%). Stripping out 4QFY21’s one-off expenses of: (i) RM2.83b global settlement amount; (ii) RM1.79b impairment of goodwill; (iii) RM147.8m impairment of associate; and (iv) RM21m related legal and professional expenses, operating expenses was reduced further by 5.7%. Core PATAMI for the period came in significantly stronger by 306%.

Key briefing’s highlights. Overall, management appears firm with its capital replenishment efforts with upcoming divestures to come which could aid the bank to achieve a targeted CET-1 ratio of 12.5%. Fundamentally, the group has been pegging its loan growth potential close to the national GDP performance and this will likely see some minor setbacks in the coming quarters. This in mind coaxed the need for further management overlays in the event of prolonged economic weakness. With regards to the group’s TRA, it now constitutes 32% of gross loans in Aug 2021 from 18% in early July 2021, no thanks to PEMULIH’s opt-in moratorium which applicants also make up of T20s. That said, management is still hopeful that the group can soundly achieve an average PATAMI of RM350m/quarter, backed by greater confidence in NIMs at over 2% (from 1.90%-1.95%) and a sustained ROE of 9%.

Post results, we raise our model assumptions but also impute a higher credit cost in line with management’s guidance from 50 bps to 65 bps, resulting in a net change of 3% in our FY22E earnings. Meanwhile, we also raise our FY23E earnings by 13% as we believe the group could benefit from improved impairment from the heightened pre-emptive provisions.

Maintain MP with a higher TP of RM3.20 (from RM2.85). In addition to our revised earnings, we ascribe higher ROE assumptions in our GGM-derived PBV valuations as we believe the bank has build and strengthened a sustainable enough frame to drive itself post the pandemic. This puts our GGM-derived PBV at 0.65x (from 0.58x, 0.5 SD below mean) against our applied CY22E BVPS of RM4.96/share. We also believe investor sentiment is less tepid after shaking off the global settlement saga.

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 Sept 2021