KEY INVESTMENT HIGHLIGHTS

• Earnings were within expectations; strong end to the year

• Robust NOII growth the main driver, moderating higher provisions

• Group gross loans and deposits growth were led by Malaysia

• Final dividend of 39sen/share, bringing total dividends to 64/sen; higher than expected

• Expecting short term stress but fundamentals intact

• Adjustments to FY21 earnings forecast downwards by - 3.5%

• Maintain BUY with revised TP of RM9.55 (from RM10.30)

Met expectations. The Group posted FY19 earnings met ours and consensus’ expectations. Its RM8.2b net profit came in at 101.4% and 102.8% of ours and consensus’ full year estimates respectively.

Earnings ended the year strongly. Net profit for the Group grew strongly in 4QFY19, by +5.3%yoy and +22.5%qoq. As a result, FY19 net profit expanded +1.0%yoy. Main driver for the earnings growth was the +4.6%yoy rise in net income and containment of OPEX (+2.8%yoy).

Strong NOII growth. NOII grew 10.7%yoy, led by investment & trading income (>100%yoy to RM1.69b) and unrealized gains on financial assets (>100%yoy to RM1.37b). This had supported NII which expanded a decent +2.2%yoy. Full year NIM had compressed -6bp yoy due to the OPR cut in May-19. However, as we noted in our 3QFY19 result review, NIM had recovered.

Credit cost within guidance. Net credit cost improved in 4QFY19 to 26bp. As a result, FY19 net credit cost came in at 44bp which was within the management’s guidance. Bulk of the impairments came in 3QFY19, which 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.

Comparing from last quarter, GIL ratio slightly better. GIL ratio as at 4QFY19 was -2bp qoq better. This was due to improvement in asset quality in Malaysia and Indonesia where it was lower by -12bp qoq to 1.95% and -57bp qoq to 4.48% respectively. This was moderated by the uptick in Singapore, where the GIL ratio rose +48bp qoq to 3.87%. Main pressure was from the SME, business and corporate segment.

Malaysian operation supported loans growth. Group gross loans growth was tepid at +1.2%yoy to RM523.5b. This was due to contraction of the Group’s loans book at the international segment (- 4.2%yoy to RM203.0b. However, its Malaysia loans book expanded +4.9%yoy to RM314.1b led by both consumer and business segment. Retail mortgage and auto finance grew +11.6%yoy to RM97.6b and +4.2%yoy to RM49.9b respectively, while SME segment went up +11.6%yoy to RM19.1b.

Deposits growth outpacing loans growth slightly. Group deposits increased +1.6%yoy to RM565.3b. Malaysia deposits grew +2.2%yoy to RM351.5b driven by FD growth of +6.3%yoy to RM133.8b. However, there were also CASA growth of +2.2%yoy to RM136.0b. Indonesia saw a drop in deposits which fell -5.3%yoy to IDR110.9t coming from both FD and CASA. However, we should note that some of this decline was due to the Group releasing the FD which it had accumulated earlier in the year for the purpose of building a buffer prior to the elections there.

Higher than expected dividends, and all cash too. The Group announced a final dividend of 39sen/share, bringing total dividends to 64sen/share or 87.8% payout ratio. This is higher than we had expected where we were anticipating a total dividend of 56sen/share for FY19. As an added sweetener, the dividends will be all cash, i.e. 100% cash component.

Expecting some short term stress in a tough operating environment. We recognize that there some headwinds this year, namely the Covid-19 outbreak, lower interest rate environment, domestic political and geopolitical issues. We expect that this may give some stress to the Group’s asset quality. However, the Group also took proactive steps to mitigate potential stress such as restructuring and rescheduling of accounts. Also, we opine that the recently announced Economic Stimulus Package may moderate some of the pressure.

Adjustment to earnings forecast. We are revising our earnings forecast for FY21 by -3.5% downward on some book keeping adjustments.

Valuation and recommendation. As we had expected, the Group’s performance had improved in 2HFY19. Income was particularly robust. Although there could be some stress to asset quality, we believe that the Group’s fundamentals remain intact. Moreover, we believe that the Group’s dividend is very attractive at current juncture with the possibility of all cash portion to be continued for now. We should note that its dividend yield of above 6% should provide a buffer from any downside risk. Hence, we maintain our BUY call with revised TP of RM9.55 (from RM10.30). Our valuation is based on lowering our PBV 1.3x to take into account the current challenging climate.

Source: MIDF Research - 28 Feb 2020