KEY INVESTMENT HIGHLIGHTS

• Earnings decline in FY20 was due to NII weakness

• NII weakness was due to NIM compression and lower loans book. Loans book constrained by need to conserve and grow capital

• Situation should improve in FY20

• Good traction from consumer and SME book

• Vigilant over asset quality

• No change to forecase

• Maintain NEUTRAL with revised TP of RM1.87 (from RM2.10)

Key take away – expecting improvement in income. We met with the management yesterday. Below are the key take away:

• NII weakness from NIM compression and decline in loans book

• The management expects loans book to expand and provide support to NII this year

• The management expects better traction for consumer and SME segment with several enhancement to customer experience

• The Group will remain vigilant on the impact of Covid-19 to its asset quality but it does expect more R&R

Earnings decline due to weakness in NII. Recall, the Group saw its FY19 net profit declined -3.0%yoy. However, it was within our expectations at 97.6% of our full year estimates. The main reason for the earnings decline was weaken NII, which -12.1%yoy to RM743.1m.

NII weakness came from external and internal constraint. The main contributors to the lowered NII were NIM compression and contraction in its loans book. NIM compression was due to the OPR cut in May-19 and higher funding cost. The Group had accumulated deposits in order to meet NSFR requirements. The fastest way to increase its deposits base was through fixed deposits, which caused funding cost to increase. Meanwhile, the Group also had constraint in regards to growing its asset base. Gross loans fell -6.1%yoy to RM46.0b. This was due to the fact that it needed to conserve and expand its capital.

Should be better for FY20. As for FY20, the management expects that loans book to grow as its capital position has been strengthened. Its CET1 capital and total capital ratios stood at 14.4% and 23.2% respectively. The management has guided a loans growth of 4% to 5%. This is expected to be funded via a deposits growth of the same magnitude, 4% to 5%. We opine that the Group’s loans growth target is reasonable. We also expect that it may moderate any NIM compression that will come from the OPR cut in Jan-19 and potentially another cut.

Good traction from consumer and SME. The management indicated that its strategy to focus on the consumer and SME segments have gained some traction. For example, the composition of gross loans as at end 2016 of these two sectors were 47% and 8.4% respectively. However, these have grown to 54.6% and 9.1% respectively. We believe that this will further increase in FY20 especially as the Group expects to launch several enhancements to customer experience which may attract more consumers. Also, we expect this will help moderate NIM compression with potentially more CASA

An eye on asset quality. The Group had done well to improve its asset quality with the resolution of several impaired accounts. GIL ratio as at end FY19 went down to 3.00% from 3.25% the previous year. The management expects that there will be more resolution of impaired accounts this year and GIL ratio should improve further. However, we are concern on the potential impact of Covid-19 to asset quality especially from its corporate and SME book. We do not discount the possibility of GIL ratio increasing in FY20. Nevertheless, the management indicated that it will remain vigilant and it does expect more R&R of accounts.

Maintaining forecast. We are maintaining our forecast for now as we expect only a modest growth this year.

Valuation and recommendation. We believe that the Group will continue to face with NIM compression and NII pressure this year due to the OPR cuts. However, we do expect it to be at a lower level than in FY19, and overall income should continue to grow. Also, better expansion in CASA deposits may also moderate the impact of the OPR cuts. One area that we will be keeping a close eye on will be the Group’s asset quality. For now, its GIL ratio remains stable albeit on the high side. All-in, we maintain our NEUTRAL call for the stock as we do not see any immediate catalyst. We revised our TP to RM1.87 (from RM2.10) as we peg its FY20 BVPS to 0.4x PBV.

Source: MIDF Research - 3 Mar 2020