1HFY23 earnings of RM854.6m (+21%) and interim dividend of 6.0 sen are within expectations. The group’s position in the market appears to be expanding thank to efforts in loans acquisition whilst keeping asset quality in check. The completion of the group’s general insurance partial divesture should pave way for better returns in the space. Also, possible re-entry into the FBM KLCI may trigger kneejerk interest in the stock on portfolio recalibration. Maintain OP and GGM-derived PBV TP of RM4.75.

1HFY23 within expectations. 1HFY23 PATAMI of RM854.6m made up 51% of our full-year forecast and 54% of consensus full-year estimate. This includes contributions from its partially divested general insurance operations (losses of RM77.5m) and lumpier minority interests gains from its transition as a subsidiary to an associate company (51% to 30% holdings). Meanwhile, an interim dividend of 6.0 sen is also deemed in line with our full-year expectation of 16.0 sen (c.30% payout).

YoY, 1HFY23 total income grew by 9% arising from wider interest income supported by higher loans (+8%) and OPR-led net interest margin expansion (2.12%, +15bps). This was mitigated by an 11% drop in non interest income, mainly owing to weaker investment income as well as the exclusion of general insurance business. Cost-income ratio saw a slightly bump (+0.5ppt) from a broad-based increase in operating expenses. Meanwhile, credit cost tapered down to 25 bps (-42 bps) as loan staging improved from the ongoing economic recovery. All-in, this led to continuing operations to come in 35% stronger. Including the results from discontinued operations in AmGeneral and minority interest, 1HFY23 PATAMI only grew by 21% to RM854.6m.

Briefing’s highlights. Post-AmGeneral’s partial divestiture, integration costs could possibly overrun any associate contributions from the newly enlarged Liberty General Insurance operations. That said, the group would benefit from a 20-year bancassurance tie-up which may in the long run, net stronger returns. Meanwhile, there appears to be a broad-based loans growth across most segments with better headway in the wholesale space. The group is well below its credit cost guidance of 35-40 bps, which would provide room should further overlays be required in the coming quarters. Concerns would mainly arise from interest rate stress, as delinquency risks may arise from graduated repayment assistance accounts. With regards to interest rates, margins are likely to see downside pressure as well on a more competitive CASA landscape, leading to earlier guidance to be unchanged.

Forecasts. Post results, our FY23F/FY24F earnings are lowered by 1%/2% from model updates and to incorporate lower returns from its discontinued operations.

Maintain OUTPERFORM and TP of RM4.75. Our TP is based on an unchanged GGM-derived PBV of 0.84x (COE: 10.7%, TG: 3.5%, ROE: 9.5%) on an applied CY23F BVPS of RM5.69. We believe the group could be a key beneficiary of the ongoing economic recovery from its notable SME loans profile (21%). The group also seeks to enjoy a better long-term growth trajectory from its more aggressive partnerships against its peers. On the flipside, a possible re-entry into the FBM KLCI would likely spur buying interest as investors seek to recalibrate their portfolio. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 1 Dec 2022