INVESTMENT HIGHLIGHTS

• Meet expectations

• Earnings impacted by tepid income increase

• Marginal income expansion affected by OPR cut and higher funding cost overseas

• Expect income to perform better in 2HFY19

• Sequential quarter asset deterioration but sufficiently covered

• No revision to FY19 and FY20 forecast

• All cash interim dividend of 25sen

• Maintain BUY with revised TP of RM10.30 (from RM11.00)

Just meeting expectations. The Group posted 1HFY19 net profit just met our and consensus’ expectations. Its earnings of RM3.75b came in at 44.8% and 44.7% of respective full year estimates.

Earnings decline was lower. Net profit for 1HFY19 was down by - 2.1%yoy but the pace of earnings decline had slowed in 2QFY19 to - 0.9%yoy from -3.3%yoy in 1QFY19. Income growth was tepid in the quarter but provisions were lower by -19.6%yoy despite uptick in GIL ratio. As for 1HFY19, earnings decline was due to higher provisions in 1QFY19 and negative JAWS.

NOII rebounded in 2QFY19 but pressure on NII. NOII rebounded in 2QFY19 expanding +3.6%yoy in 2QFY19 as opposed to the -1.6%yoy decline in 1QFY19. This was due to higher investment & trading income (>100% to RM438m) and unrealised gain on financial assets and investments (>100% to RM476m). This resulted in 1HFY19 NOII to grow +1.1%yoy. However, income pressure came from NII as increased marginally in 2QFY19, by +0.3%yoy leading to +1.0%yoy expansion in 1HFY19. Main contributor was the robust gross loans growth that was moderated by NIM compression of -9bp yoy in 1HFY19. The compression was due to lower Malaysia loan yield from OPR cut and higher deposit cost in overseas markets especially Indonesia where the Group built up its liquidity buffer prior to the general election there.

Expectations of improvement in 2HFY19. Moving forward, the management expect that NIM will stay flat for the rest of the year with another OPR cut being imputed. We understand that COF will likely improve in Indonesia. We opine that the Group will release the more expensive deposits and fixed deposit repriced lower. We expect NII to improve in 2HFY19.

Uptick in GIL ratio on sequential quarter basis but stable year-on-year. There was an uptick in GIL ratio when compared asset quality as at 2QFY19 with 1QFY19. GIL ratio went up +14bp qoq due to higher NPLs either through direct new formation or IPLs turning into NPLs. In term of the Group’s home market, GIL ratio went up in Malaysia (+25bp qoq to 2.11%) and Indonesia (+26bp qoq to 4.26%). This could be attributed to the corporate banking segment in Malaysia and, retail SME and business banking in Indonesia. However, on a year-on-year basis, GIL ratio was relatively stable. We note that despite higher NPLs, provisions fell suggesting that there was sufficient coverage for the impaired loans.

Robust gross loans growth. The Group registered a robust gross loans growth of +4.6%yoy to RM525.6b despite the challenging environment. All home markets saw gross loans expansion whereby it grew (in local currency terms) +4.2%yoy to RM302.9b, +2.3%yoy to SGD42.9b and +6.1%yoy to IDR139.2t in Malaysia, Singapore and Indonesia respectively. Main drivers for the growth were mortgages (+9.0%yoy to RM91.5b), auto finance (+4.5%yoy to RM48.9b), unit trust (+6.7%yoy to RM29.6b) and SME (+11.9%yoy to RM17.8b) in Malaysia, and global banking in Singapore and Indonesia (+3.0%yoy to SGD19.9b, +24.2%yoy to IDR40.5t respectively).

Sufficient deposits growth. Group deposits increased +3.9%yoy to RM560.9b as at 2QFY19. We were pleased that fixed deposits growth was kept in check as it rose +2.4%yoy to RM291.9b. It was marginally higher in Malaysia (+1.0%yoy to RM146.5b) while declining in Singapore (-4.4%yoy to SGD31.5b). It saw strong increase in Indonesia (+26.9%yoy to RM84.1b) but as we mentioned, this was due to the management wanted to build up liquidity buffer. We are not concern by this as we expect the Group will likely let these FD mature deplete. We also noted that the Group focused on other deposits such as money market deposit where it grew +12.0%yoy to RM73.2b. Meanwhile, CASA rose +3.4%yoy to RM195.8b.

Stable in Malaysia and Indonesia but still pocket of headwinds. We understand that the management expects pockets of headwinds to still remain namely; (1) effect of US-China trade war in Singapore, (2) potentially slower loans growth arising from cautious business sentiment, and (3) deposit competition putting pressure on NIM in Malaysia. However, we believe that there Malaysia and Indonesia will remain stable. This will likely be supported by stable economic growth and stable inflation rate, stimulus to domestic demand from OPR cut in Malaysia and consumption boosted by a minimum wage increase in Indonesia.

FORECAST

We are maintaining our FY19 and FY20 forecast.

VALUATION AND RECOMMENDATION

While earnings decline, we saw some pockets of improvement such as NOII rebounding in 2QFY19. Furthermore, provisions seem to be steady and the management are guiding credit cost of between 40 to 45bp despite some impairments. In our opinion, NIM could potentially improve should there be no further OPR cut in Malaysia as the more expensive deposits in Indonesia get release. All-in, we are sanguine on the Group’s earnings in 2HFY19. Besides, we believe that it is more prudent to be invested in banks with scale during current uncertain economic climate. Hence, we maintain our BUY call. We are revising downward our TP to RM10.30 (from RM11.00) as we adjust to a lower PBV of 1.4x (from 1.5x) to into account the impact of current uncertainties on valuation. Nevertheless, we should note that its dividend yield of circa 6% should provide a buffer from any downside risk.

Source: MIDF Research - 30 Aug 2019