KEY INVESTMENT HIGHLIGHTS

• Results were below expectations as we underestimated the tax expense

• Lower earnings on weak NII. However, NOII growth moderated the impact

• Provisions were lower overall but increased in 3QFY19

• Gross loans contracted but could be deliberate

• FD continue to lead deposits growth

• Revising FY19 and FY20 earnings forecast downwards

• Maintain NEUTRAL with unchanged TP of RM2.10

Did not meet expectations. The Group 9MFY19 earnings did not meet expectations. It came at 65.4% and 65.2% of our and consensus' expectations respectively. The variance was due to our underestimation of its tax expense and partly due to higher than expected OPEX.

Weak earnings in 3QFY19. The Group posted 9MFY19 net profit growth of only +1.8%yoy due to weakness in income in 3QFY19. Its net income in 3QFY19 fell -4.4%yoy resulting in 9MFY19 net income to decline by -1.5%yoy. NII in 9MFY19 fell -12.8%yoy due to reduction in loans portfolio, lower NIM and reduction in financial investments. However, this was moderated by the +11.3%yoy rise in NOII which was supported by net gains in financial instruments.

Continue to invest. OPEX was well contained; growing +0.9%yoy as the Group continues to invest in its transformation. However, as a result of weakness in income, CI ratio remains above 60% level at 64.5%.

Lower provisions but higher GIL ratio. ECL was considerably lower in 9MFY19 due write backs and recoveries in 1HFY19. However, ECL rose in 3QFY19. Also, write backs and recoveries in 9MFY19 was - 17.6%yoy lower to RM36.0m. The provisions in 3QFY19 reflected in GIL ratio reaching higher by +65bp yoy. We understand the higher GIL ratio was due to proactive restructuring and rescheduling of potential stressed accounts.

Gross loans contracted. Gross loans as at 3QFY19 contracted - 5.3%yoy to RM46.6b. However, this could be partly deliberate as the Group reduces its exposure to business entities. Loans to business enterprise fell -10.3%yoy to RM22.0b with SMEs loans reducing by - 31.8%yoy to RM8.1b. Nevertheless, the growth of +2.9%yoy to RM22.8b in loans to individuals was not enough to offset the decline in business loans. Main driver for loans to individuals were mortgages where it grew +13.6%yoy to RM11.3b.

Fixed deposits continue to drive deposits growth. Deposits grew +1.8%yoy to RM56.9b. While CASA grew +1.1%yoy to RM8.3b, the Group continues to be funded by the more expensive fixed deposits (FD) as it grew +15.0%yoy to RM45.8b. We opine that this had put NII under pressure.

Source: MIDF Research - 29 Nov 2019