KEY INVESTMENT HIGHLIGHTS

• Result was in line with expectations

• Robust PPOP expansion as better NII came from improvement in NIM and strong trading gains

• Credit cost normalizing but mindful on potential stress to asset quality

• Tepid loans growth

• Expensive retail deposits contracted

• Higher interim dividend of 6sen (vs. 5sen in 1HFY19)

• No change to FY19 and FY20 earnings forecast

• Upgrade to TRADING BUY (from NEUTRAL)

Results in line. The Group registered its 1HFY20 which was in line with expectations. It came in at 50.8% and 50.7% of ours and consensus’ full year estimates respectively.

Earnings growth on robust PPOP expansion. Net profit grew +2.2%yoy in 1HFY20 as the PPOP expansion of +7.6%yoy moderated the higher credit cost. The higher PPOP was due to a combination of resilient income and controlled OPEX.

NIM improvement led to better NII. The Group saw its NII (inclusive of Islamic banking net fund based income) rising by +4.6%yoy to RM1.35b in 1HFY20 despite tepid gross loans growth. Instead it mostly came from NIM improvement in the quarter. NIM was flat year-on-year but was +4bp qoq better due to lower cost of fund. The Group managed to reprice its deposits following the OPR cut in May’19 and to release fixed deposits (FD).

NOII played a supporting role. NOII (inclusive from Islamic banking) grew +7.4%yoy to RM785m. Main driver was the strong trading gains recorded with RM63m (+>100%yoy) contribution from Group Treasury.

Credit cost normalizing but mindful of asset quality. Provisions in 1HFY20 were much higher as legacy recoveries ended. While we were glad by this, we have to be mindful that it was not due to sudden deterioration of asset quality. We observe that individual allowance came in at RM52.6m and we understand that this was due to several impaired accounts in manufacturing sector and holding of a corporate bond. GIL ratio as at 2QFY20 went up +5bp yoy and +11bp qoq with stress in retail and business segments.

Tepid loans growth. Gross loans growth as at 2QFY20 was tepid. It expanded by +2.0%yoy to RM102.0b, dragged by the -14.7%yoy contraction to RM15.3b in the Group’s auto loans book. Also, loans growth in non-SME business segment was weak, increasing only by +1.8%yoy to RM22.8b. We believe that this could be due to overall cautiousness displayed by businesses. However, mortgages and SME loans continued to be the support. These grew +8.6%yoy to RM31.6b and +12.5%yoy to RM20.3b respectively.

Released more expensive deposits. While deposits matched gross loans growth with its +1.9%yoy expansion to RM102.7b, we believe there were more positives as deposits mix was being reorganized. Retail FD contracted -17.7%yoy to RM35.3b which we viewed positively. However, non-retail FD grew +22.8%yoy to RM44.1b moderating the retail FD decline. We opine that another positive would be that CASA grew +6.4%yoy to RM23.4b.

Revision in guidance with some improvement. The management is gave a revised FY20 guidance with some improvement (see Table 1 below). We believe that this suggest that the Group’s performance 1HFY20 can at least be maintained in 2HFY20. Most interestingly in our opinion is that investors could expect higher dividends.

No change in earnings forecast. We are maintaining our earnings forecast for FY19 and FY20 as the result were within expectations.

Valuation and recommendation. We continue to be pleasantly surprised by the Group’s resilience in light of the challenging environment. Most surprising was the robustness of its income especially NII. While gross loans growth was tepid, we should highlight that the growth in major segments had been robust. Taking all into consideration, we upgrade our recommendation to TRADING BUY (from NEUTRAL) as the Group's performance may boost sentiment for the stock. In addition, the guidance of higher dividends should provide an added incentive for investors. We should note that we expect a dividend yield of circa 5% given its current share price. Our TP remains unchanged at RM4.20 based on PBV of 0.68x.

Source: MIDF Research - 2 Dec 2019