KEY INVESTMENT HIGHLIGHTS

• Earnings did not meet expectations as provisions came in higher than expected

• Higher provisions due to an account in Singapore

• PPOP came in within expectations; NII saw surprise growth but NOII fell

• Cost well contained

• Decent gross loans growth and CASA led deposits growth

• Revision to FY20, FY21 and FY22 earnings forecast

• Downgrade to TRADING BUY with revised TP of RM4.00

Missed expectations. The Group reported 1QFY20 net profit of RM507.9m. This was below ours and consensus’ estimates coming in at 13.8% and 12.8% of respective full year estimates. The variance was due to our underestimation of the extent of the provisions especially coming from Singapore. The growth of the total provisions was circa 15ppt higher than our estimate.

Earnings dragged by higher provisions. Group earnings fell - 57.4%yoy weighed down by higher provisions. Total provisions increased by more than threefold to RM1.13b. As a result annualized credit cost was 106bp for the quarter. The significant increase in provisions was due to loan provisions from a single impairment in Singapore from the Oil & Gas sector amounting to circa RM430m. We also understand that this might involve a fraud case by the borrower.

PPOP performing within expectations. In terms of PPOP, the Group registered a decline of -2.1%yoy. However, this was within our expectations coming in at 23.9% of our full year estimate. NII was robust despite the rate cuts seen in the quarter. It grew +4.8%yoy despite NIM contracting -4bp yoy. Main driver for NII growth was decent gross loans growth. Meanwhile, the weakness in income came from NOII as it fell -15.5%yoy contributed by lower trading & FX income which contracted -23.8%yoy to RM337m.

Cost well contained. OPEX was relatively flat, increasing marginally by +0.7%yoy. Personnel expenses were kept in check, coming in flat at RM1.35b, while establishment and admin & general cost fell -1.2%yoy to RM497m and -1.6%yoy to RM374m respectively.

Decent loans growth despite tough environment. Group gross loans expanded +3.8%yoy to RM363.9b as at 1QFY20. Main driver was consumer and wholesale banking where the loans book grew +5.4%yoy to RM181.9b and +6.3%yoy to RM118.8b respectively. Consumer banking loans book expansion was attributable to growth in mortgages in Malaysia, Indonesia and Singapore as it grew +9.0%yoy, +11.6%yoy and +27.1%yoy respectively.

CASA led deposits growth. Total deposits grew +3.5%yoy to RM388.5b. This was led by CASA growth of +15.5%yoy to RM145.0b while fixed deposits rose +3.0%yoy to RM181.7b. We opine that this is part of the factor for the robust NII.

Questions will be raised on asset quality. The Group’s GIL ratio went up by +40bp yoy to 3.4% as it was impacted by the unexpected impairment of the one particular account in Singapore. We expect that asset quality will come under pressure from the Group’s oil & gas exposure and the impact from the Covid-19 pandemic. However, we should note that its oil & gas exposure stood at 2.4% of total loans book.

Revision in earnings forecast. In light of the higher credit cost, we are revising our earnings forecast downwards for FY20, FY21 and FY22 by -33.7%, -14.0% and -2.7% respectively.

Valuation and recommendation. It was a mix bag in terms of the Group’s performance in 1QFY20. While PPOP was within our expectation, we were surprised by the credit cost level seen in the quarter. We expect that credit cost might remain elevated this year due to some corporate failure in the oil & gas sector in Singapore. However looking ahead, this might mean that there should be an improvement next year. Furthermore, we believe that this might have already priced in given its recent share price performance. In fact, it may have overshoot in relation to its fundamentals. Hence, there might be some trading opportunities premised upon the potential improvement next year. Therefore, we are downgrading our call to TRADING BUY (from BUY). We rollover our valuation to FY21, pegging our FY21 BVPS to PBV of 0.7x. As such, we are revising our TP to RM3.95 (from RM4.30).

Source: MIDF Research - 27 May 2020