INVESTMENT HIGHLIGHTS

• In line with expectations

• Robust PPOP growth

• Higher writebacks on resolution of certain large corporate account

• Gross loans growth muted but CASA traction remain good

• Uptick in impaired loans quarter-on-quarter

• No change to forecast

• Maintain NEUTRAL with revised TP of RM4.20 (from RM4.50). While we rollover our valuation to FY21, we are also reducing our PBV to reflect current uncertainty

In line with expectations. The Group posted its 1QFY20 earnings which were in line with expectations. It came 27.9% of ours and consensus’ full year estimates respectively. The +12.6%yoy earnings growth was due to robust PPOP expansion and higher writebacks.

Stable income growth and contained OPEX. PPOP expanded +7.0%yoy supported by +5.0%yoy growth in net income. NII (conventional and Islamic) rose +4%yoy to RM669m despite NIM compressing -15bp yoy. This could be due support from gross loans expansion albeit at more muted pace. NOII grew +6.0%yoy contributed by improved trading due to lower bond yields from OPR cut and insurance income. Meanwhile, OPEX was contained, rising by +3.0%yoy attributable to RM21m increase in staff cost.

Higher recoveries a boost. There were recoveries amounting to RM24.1m which resulted in writebacks of RM32.5m in the quarter. This was due to resolution of certain large corporate loans.

Gross loans growth muted. Gross loans increased only by +2.5%yoy to RM100.8b. Main drivers were the expansion of its focused segment, namely housing, SME and cards where it grew by +9.9%yoy to RM31.0b, +15.5%yoy to RM19.8b and +8.0%yoy to RM2.2b respectively. However, the drag came from the business segment excluding SMEs which saw a growth of +1.0%yoy to RM22.4b as there was large corporate repayments, and auto finance which fell -18.0%yoy to RM14.3b.

Uptick in GIL ratio on sequential quarter basis. The Group’s GIL ratio as at 1QFY20 saw improvement of -11bp yoy to 1.66%. However, on sequential quarter basis, there was an uptick of +7bp. This was due to higher impaired loans in the business (+10.6%qoq to RM240m) and retail (+12.6%yoy to RM820m) segment. We understand that this was due to certain accounts rather than a broad base trend.

Good CASA traction. CASA continued to have good traction as it grew +11.1%yoy to RM23.1b supported by +21.3%yoy to RM11.4b expansion in non-retail CASA. For fixed deposits (FD), it rose +2.4%yoy to RM79.7b with retail FD declining -7.2%yoy to RM38.8b. This was due to the fact that the Group decided to reduce some excess liquidity as oppose to the build-up in liquidity buffer last quarter.

In line with FY20 targets. Recall, the management is targeting for FY20; (1) ROE of circa 9%, (2) CI of less than 52.5%, (3) Dividend payout of between 40% to 45%, and (4) fully loaded CET1 of between 10.5% to 12.5%. With the targets being an incremental improvement from last year and in light of 1QFY20 result, we do not foresee the Group having difficulties to achieve it.

FORECAST

We are maintaining our FY20 and FY21 forecast.

VALUATION AND RECOMMENDATION

While NII growth had been robust thus far, we have to highlight that it was within our expectation. Furthermore, we expect the boost from writebacks will normalise in the coming quarters. We recognize that the Group’s good performance in 1QFY20 will likely boost sentiment for the stock. Nevertheless, that the escalation of the trade spat between the US and China and other external pressures such as potential slowing of global growth will weigh on the valuation of banks. This is especially so given that we are facing a highly uncertain and volatile environment. Hence, we are ascribing a lower PBV of 0.68x (from 0.8x) despite rolling over our valuation to FY21. The lower PBV is 1 standard deviation below its 5 year historical average. With this we revise our TP to RM4.20 (from RM4.50) and maintain our NEUTRAL call.

Source: MIDF Research - 23 Aug 2019