KEY INVESTMENT HIGHLIGHTS

• Results were below expectations due to stubbornly high credit cost

• Credit cost were affected by impairment in AOA especially from pre-June'18 accounts

• Operationally remains sound and robust

• Loans and deposits growing in tandem

• Discounting the AOA, asset quality stable

• Interim dividend of 6sen

• Revising FY20 and FY21 earnings forecast downwards

• Maintain TRADING BUY with revised TP of RM3.35

Below expectations. The Group's 1HFY20 earnings fell -30.6%yoy. It came in below expectations at 38.5% and 39.5% of ours and consensus' full year estimates respectively. The variance was due to our underestimation of the extent of loan loss provisions, which had been the main drag to earnings.

Credit cost stubbornly high. Provisions (including bond impairment) in 1HFY20 more than doubled from 1HFY19 level. However, it had improved on a sequential quarter basis, falling -24.6%yoy due to the absence of impairment of financial assets. Nevertheless, loan loss provisions increased by +38.5%yoy to RM77.2m in 2QFY20. As a result, net credit cost excluding bond impairment was 72bp in the quarter. This was due to higher impairments in the Alliance One Account (AOA) borrowers especially the pre-June'18 accounts.

But expected to improve in 2HFY20. The pre-June'18 accounts came from a period of aggressive campaigning from the Group and had almost equal portion of overdraft and term loans (e.g. mortgages etc.). Subsequently, the management have tighten the credit underwriting policies and indicated that the post-June'18 borrowers have better credit quality and a higher portion of term loans (72%). As such, management expects net credit cost to improve in 2HFY20. For the full year, the management revised its guidance of net credit cost (including bond impairments) to between 55bp and 60bp.

Operationally remain sound. PPOP in 2QFY20 expanded strongly, by +10.7%qoq and +11.4%yoy. As a result, 1HFY20 PPOP grew +3.5%yoy. The contributors were the net income growth of +4.5%yoy and controlled OPEX where it rose +5.7%yoy.

NOII driver for net income growth. NOII grew +17.4%yoy in 1HFY20 due to higher treasury and investment income which compensated lower fee based income. As for NII, it expanded +1.5%yoy as the gross loans growth and continued improvement in asset mix moderate the lower NIM, where it was impacted by the OPR cut and delinquency pricing revision. The delinquency pricing is a change to a higher loan pricing when the borrower becomes delinquent, and should have been for a specific term. However, the regulator required that the pricing be revised immediately to pre-delinquent price for borrowers that have turned performing again.

Source: MIDF Research - 28 Nov 2019