KEY INVESTMENT HIGHLIGHTS

• Earnings were a shade below expectations as we had underestimated the tax expense. Besides this, results were within expectations

• There were a recovery in income and earnings in 3QFY19

• Increased credit cost and uptick in GIL ratio came from Singapore and Indonesia corporates and retail SMEs

• Loans growth led by Malaysian mortgages and SMEs

• Revising FY19 and FY20 earnings forecast downwards on book keeping adjustments

• Maintain BUY with unchanged TP of RM10.30

A shade below expectations. The Group’s 9MFY19 was only slightly below ours but within consensus’ expectations. It came at 69% and 72.1% of respective full year estimates. The variance was due to our underestimation of the tax expense. Other than this, the Group’s performance was as we had expected. Its 9MFY19 PBT was 71.7% of our full year PBT estimate.

Earnings recovered in 3QFY19. The Group saw its 3QFY19 net profit recovered as it grew +3.0%qoq and +2.1%yoy. As a result, 9MFY19 earnings were almost flat earnings as the Group registered a marginal decline of -0.7%yoy. Main driver was the strong income growth in 3QFY19 subduing the impact of the high provisions in the quarter.

Robust income growth. Net operating income in 9MFY19 grew +5.3%yoy as NII and NOII rebounded strongly in 3QFY19. NII in 3QFY19 grew +6.0%yoy leading to cumulative expansion of +2.6%yoy. Major contributor was the repricing in deposits in 3QFY19 in Malaysia following the OPR cut in May’19 causing NIM to improving by +13bp yoy, moderating the compression seen in 1HFY19. Also, fixed deposits that have been accumulated prior to the Indonesian election were continuously being released. Meanwhile, NOII growth in 9MFY19 of +12.5%yoy (3MFY19: +38.6%yoy) was supported by investment & trading income ballooning to RM1.5b as the Group took profit of some of its fixed income positions.

Increase in credit cost due to external environment. Net credit cost jumped by +40bp yoy in 3QFY19. This was mostly due to new provisions for several chunky accounts in Singapore and Indonesia following weaken external environment. We were not surprised that this included trade related industry given the ongoing US-China trade spat. However, we should note that the provisioning level in 9MFY19 was still within our full year estimate, and that the management is maintaining its credit cost guidance of between 40bp to 45bp albeit at the higher end. This means that there should be some improvement in credit cost in 4QFY19 given that 9MFY19 stood at 50bp.

Reflected in the uptick in GIL ratio. GIL ratio as at 3QFY19 was +2bp yoy higher. Consumer segment GIL ratio was relatively stable across all its home markets. However, the major stress appeared to be in the retail SME segment in Indonesia where GIL ratio went up +92bp yoy to 3.48%. We understand that it was broad base. As for Singapore, corporate banking segment GIL ratio increased +75bpqoq to 7.61%. Nevertheless, it was -14bp yoy better suggesting that it was only a recent trend.

Source: MIDF Research - 29 Nov 2019