INVESTMENT HIGHLIGHTS

• Below expectations

• Earnings decline due to higher than expected provisions

• NII growth robust despite OPR cut

• Gross loans growth remained strong with higher better RAR loans

• Deposits growth outpaced gross loans growth

• Attractive dividend yield

• Not deterring from effective strategy

• External events caused risk to heighten. Downgrade to TRADING BUY with revised TP of RM3.50 (from RM4.75)

Missed expectations. The Group’s 1QFY20 earnings were below expectations. It came in at 12.6% and 13.1% of ours and consensus’ full year estimates respectively. The variance was due to higher than expected loans provision and ECL allowance on financial investments.

Higher than expected provisions. Loans provision ballooned up by +49.6%yoy and +39.7%qoq to RM55.8m. We understand that this was due to 3 accounts (2 in manufacturing and 1 in wholesale). Also, one of these accounts had caused an additional impairment of RM49.4m to the Group’s financial investment book. In total, this particular account had resulted in an impairment of circa RM64.9m (which was 100% provisioning of that particular account).

Asset quality improved year-on-year. Overall GIL ratio improved on a sequential year basis, by -30bp. Most segments saw improvements except AOA and equipment hire purchase (refer to Table 4). There were an uptick on a sequential quarter basis and it was mostly due to the aforementioned accounts, where corporate & commercial GIL ratio deteriorated to 1.0% as at 1QFY20 from 0.7% as at 4QFY19. Nevertheless, we understand it was not a broad base trend.

Proactively managing asset quality issue. We understand that the management have put in place proactive measures to manage the asset quality issues. This includes improved early warning process for corporate, commercial and SME accounts. Also, the management have tightened credit criteria for new AOA. We noted that the uptick in GIL ratio for the AOA was due to earlier accounts.

Decent NII growth despite OPR cut. NII (inclusive Islamic net financing income) grew +3.6%yoy to RM331.7m. This was despite the impact on OPR cut and accelerated deposits growth which led to NIM declining -3bp yoy. Main driver for the NII growth was the strong loans growth and better asset mix. NOII (inclusive of Islamic NOII) was a drag as it fell -6.8%yoy to RM75.2m. This was due to higher net interest expense on structured investment and lower client based fee income from wealth management and forex sales.

Strong gross loans growth and better mix too. Gross loans expanded +6.0%yoy to RM42.7b as at 1QFY20. The main contributor was the +25.8%yoy growth to RM18.8b in better RAR loans such as AOA. Comparatively, lower RAR loans contracted -5.7%yoy to RM23.9b. The solid better R&R loans growth had moderated the impact of the OPR cut on YTD basis.

Deposits growth outpaced loans growth. Customer based funding rose +8.8%yoy to RM46.6b driven by fixed deposits growth of +12.0%yoy to RM27.0b. This resulted in cost of fund to come in higher by +11bp yoy to 2.98%. Meanwhile, CASA grew +1.6%yoy to RM16.0b. This was disappointing as we had expected the traction from its Alliance@Work product to translate to better CASA growth. As such, we expect that NII could come under pressure as the positive impact of the solid better RAR growth will be moderated by higher cost of fund. Nevertheless, new FD could be re-priced lower following the OPR cut which will lessen the pressure.

Attractive dividend yield expected. Recall, the management earlier guided the following for FY20: (1) gross loans growth of circa 7%yoy, (2) NIM between 2.40% to 2.45%, (3) CI ratio to be maintained at circa 48% level, (4) net credit cost of circa 35bp, (4) ROE of more than 10%, and (5) maintain current dividend payout policy. Of this, the management have revised net credit cost expectations to less than 40bp, but this does not include the impaired financial investment. One promising fact is that dividend payout ratio will be maintained around 45-48% which at current price gives an attractive dividend yield of circa 5%.

FORECAST

We are revising our FY20 and FY21 downwards by -18.1% and -7.7% to reflect the surprised provisions.

VALUATION AND RECOMMENDATION

We were caught by surprised by the provisions that the Group had to make. While the Group will not deter from its effective strategy, we observed that one or two unexpected event could weigh its earnings down. Overall, we are turning more cautious of the Group and peers of its size as external factors, such as the escalation of the China-US trade tension, may heighten the risk to asset quality. Hence, we are revising our TP downwards to RM3.50 (from RM4.75) despite rolling over our valuation to FY21. Our TP is based on pegging its FY20 BVPS to PB multiple of 0.9x. On our recommendation, in our view the recent selloff of the stock has been overdone. We have to highlight that the management was prudent in taking 100% provision for the impaired account and a settlement will lead to write backs. Besides this, we continue to like the Group’s ability to improve its asset mix which ensures stable NII growth. With an attractive dividend yield of 5%, we believe that its share price will likely rebound. Therefore, we are downgrading the stock to TRADING BUY (from BUY) given the short term opportunities.

Source: MIDF Research - 28 Aug 2019