We maintain our GGM-derived PBV TP of RM2.45 (COE: 10%, TG: 3%, ROE: 9%) and MP call. Post 3QFY22 results briefing, the group remains determined in meeting its ROE targets despite recent setbacks to operating cost and impairments. In addition, steady loans growth and acquisition of cheap deposits should support against possible margin erosion from its debt securities holdings.

Key takeaways are as follows:

- 10% ROE target unhindered. The group had previously set a ROE target of 10% with the inclusion of prosperity tax which it believes could still be closely achieved. This is despite 9MFY22 ROE coming in at an annualised c.7.4%, suggesting 4QFY22 performance could be significantly stronger. The group is optimistic of its growing loans books (+9% YTD), which we gathered would be stirred by more retail financing. The group also indicates that it would be striving to boost its deposits base to keep its loan-to-deposit levels manageable. Meanwhile, sequential net interest margins (NIMs) appear to be able to capitalise on the progress OPR hikes. NIMs target for FY22 is also unchanged, at above 2.20%.

- Non-fund base could continue to be stressed. As opposed to the abovementioned fund-based performance, the group anticipates deterioration in non-fund based income with every OPR hike as its debt securities holdings experience a widening gap from revaluations. Meanwhile, its unit trust segment is also experiencing a pinch in mark to-market losses on shifting market conditions, though we believe this may gradually improve going into FY23. That said, relief is seen in its fees and commission income thanks to its solid Bancatakaful presence.

- Bump in personnel cost arising from unionised employees. Giving clarity to the 15% surge in personnel cost in 9MFY22, the group indicated that nearly two-thirds of the increase is due to a tri-annual wage review of its unionised employees and hence should not be a repeating pressure. The rise in expenses here going forward would otherwise be used to enhance its digital and wholesale capabilities.

- Credit cost buffers to hold until FY23. With an outstanding management overlay of RM143.9m, the group highlighted that it would need to be utilised by FY23 if it is not otherwise reallocated to other accounts. The group indicated that it would still be cautious with its provisioning needs where we see its 9MFY22 credit cost of 22 bps lingers, shy from its 30-35 bps guidance for the year, indicating possible top-ups if required. Meanwhile, the group shared that it had incorporated an ESG assessment in its screening process to promote sustainability efforts.

Forecasts. Post meeting, our FY22F/FY23F earnings are unchanged.

Maintain MARKET PERFORM and TP of RM2.45. Our TP is based on an unchanged GGM-derived PBV of 0.85x (COE: 10.0%, TG: 3.0%, ROE: 9.0%) on our FY23F BVPS. While the stock offers an investment opportunity in a shariah-compliant financier, we believe the risk-reward at current price levels is well matched. 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/lower-than-expected margin, (ii) higher/lower-than-expected loans growth, (iii) better/worse-than-expected movement in asset quality, (iv) stronger/weaker capital market activities, (v) favourable/unfavourable currency fluctuations and (vi) changes in OPR.

Source: Kenanga Research - 2 Dec 2022