1QFY22 net earnings of RM858.3m (+18%) is deemed to be broadly within expectations, as we are cautious of lumpier provisioning to come from assistance programs. Management also maintains its guidance for now. The group’s existing operating framework and buffers could sufficiently shelter against headwinds but we are modest with the delivery of its returns. Maintain MP and GGM- derived PBV TP of RM18.20.

1QFY22 broadly within. 1QFY22 net profit of RM858.3m is deemed to be broadly within expectations. It made up 31%/27% of our/consensus expectations. We anticipate more provisions to be booked in the coming quarters, making up closer to management’s credit cost expectations (1QFY22: 13bps, vs. 20bps target). No dividend was declared this quarter, as expected.

YoY, 1QFY22 total income rose slightly (+2%) as better NII (+6%), driven by loans growth (+5%) amidst easing NIM (our computed 1.89%, -2 bps) was mitigated by weakness in NOII (-9%) owing to diminished investment gains. On the flipside, operating expenses improved by 3% on more streamlined personnel cost, leading to a CIR of 36.8% (-180 bps). Impairment allowances were softer this year (-53%) from a better comparative landscape from FY21 with an annualised credit cost of 13 bps (-16bps). 18%-owned associate, Bank of Chengdu provided stronger shared profits (+31%) thanks to better loans and operating performance. This translated to an 18% earnings growth for 1QFY22 at RM858.3m.

QoQ, 1QFY22 total income’s 4% gain was thanks to stronger fees and investment income propelling NOII (+67%). Meanwhile, NII fell by 7% as loans portfolio was stagnant amidst suppressed NIMs, no thanks to modification loss (-8bps impact) during the quarter. Meanwhile, provisions were 75% lower as 4QFY21 saw some frontloading of overlays against the implemented lockdown. 1QFY22 closed with a 25% net profit improvement.

Key briefing’s highlight. In spite of the strong delivery of this quarter results, management is still cautious with the group’s near-term prospects. While current URUS applications are few, a possible influx in the coming quarters could inflate provisioning. That said, the group is currently sitting on significant buffers (RM835m overlays) which could soften sudden shifts in the market. Immediate loans performance may be tepid but could be made up by the clearing of backlog in applications going forward. Cost-wise, there may be further traction from its cost streamlining efforts as it moves to digitalize its processes. Meanwhile, Bank of Chengdu is expected to continue reporting buoyant growth thanks to a more sustainable economic performance. In line with its conservatism, management maintains its FY22 guidance for now.

Post results, we tweak our FY22E/FY23E earnings from model updates.

Maintain MARKET PERFORM and TP of RM18.20. Our call is based on an unchanged GGM-derived PBV of 1.17x (1.0SD below mean) on a CY22E BV of RM15.64. The stock seems to be well positioned to ride through uncertainties arising from a possible worsening of Covid-19, with one of the lowest GIL ratio and highest LLC amongst its peers. However, this is offset by our soft ROE and dividend yield projections at the moment, evening out its risk-to-reward.

Risks to our call include: (i) higher/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loans growth, (iii) better/worse-than-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 - 30 Nov 2021