KEY INVESTMENT HIGHLIGHTS

• Loans growth will likely miss FY19 guidance due to slower corporate loans. However, retail and SME segment expected to continue to be robust

• NOII is expected to continue driving income growth

• No concern on asset quality and credit cost tracking below guidance of 40bp to 50bp

• Management expect ROE to be comfortably within the guidance of 9% to 9.5% for this year

• No change to FY19 and FY20 earnings forecast

• Maintain BUY with unchanged TP of RM6.30

Key takeaways to meeting. We met with the Group’s management yesterday, and below are the key takeaways:

• Some pressure to loans growth

• Expectations of 3QFY19 topline to be at similar level to 2QFY19

• Credit cost tracking lower than guidance

• Seems comfortable to reach ROE target

Lower than expected growth in corporate loans. Recall, the management had guided 6% to 7% loans growth for FY19. However, based on current trends, the management expects that loans growth might come in lower than guidance. The main drag for loans growth will be corporate loans in Malaysia which has seen a pullback in either demand or disbursements. This is possibly due to cautiousness in the current business environment. As for the retail segment, loans growth seems stable with mortgage and auto loans the main driver in Malaysia. The management expects loans growth in other markets to remain stable as well.

NIM holding steady. While the management expects there will be NIM compression this year, it seems that the magnitude will be within expectations. NIM for 3QFY19 in Malaysia is expected to improve as deposits are repriced lower following OPR cut in May. Meanwhile, Indonesia’s NIM will face some pressure from deposit competition and 3 rate cuts there thus far. However, the Group has begun some initiative to capture CASA which should ease some of the compression. Overall, we do not expect any downside pressure to NII in 3QFY19.

Treasury income will likely lead NOII. We understand that income from trading and FX is expected to continue to be a significant contributor to NOII. There will also be some expected one-off gains which we believe should ensure NOII momentum in 3QFY19 is maintain.

No concern to asset quality. Asset quality is expected to remain stable. As such, the management does not foresee any surprise provisions in the remaining quarter this year. We understand there will not be any additional provisions for a particular account in Indonesia as it was fully provided last quarter. Resultantly, credit cost will continue to track below guidance of 40bp to 50bp, and will likely end in the lower of the range.

ROE target comfortable. Given the expected income performance, the management is comfortable that it will be able to hit its ROE target for FY19 of 9% to 9.5%. We understand that there could potentially be some one-off increase in OPEX, but this will be mitigated by the lower credit cost. We are expecting an ROE of 9.3%.

Discussion on Budget 2020. There was also a discussion on the potential impact from Budget 2020. The management expects that there could be some positive impact given that it is an expansionary budget. The Group will also participate in some of the initiatives that the Government have announced such as the Rent-to-Own home scheme.

No change in earnings forecast. We are maintaining our earnings forecast for FY19 and FY20 as the Group will be announcing its result next month.

Valuation and recommendation. Overall, we continue to be cautiously optimistic on the Group’s prospects. We expect that the Group could see its earnings improve in FY19 despite the NIM compression. However, we are cognisant that this will be due to one-off gains seen in 2QFY19 even if it is considered as “Business As Usual”. Nevertheless, we believe the underlying factors such as income and credit cost are improving. In terms of valuation, we believe that the Group’s valuation is cheap at current juncture as it trades below 1x PBV. We do not believe such valuation is warranted for the Group given that we do not foresee any deterioration in its fundamentals. Hence, we maintain our BUY call with unchanged TP of RM6.30, based on pegging its FY20 BVPS to a PBV of 1.1x. In addition its dividend yield of 5.0% should provide some protection to investors from any downside risks.

Source: MIDF Research - 25 Oct 2019