KEY INVESTMENT HIGHLIGHTS

• The Group posted 1QFY20 earnings that was within ours and consensus’ expectations

• Earnings were dragged by lower NII

• NOII growth moderated the weak NII

• Higher provision could be preemptive. Position well covered with loan loss coverage of more than 100%

• Asset quality remain strong

• Decent loans and deposits growth

• No change to earnings forecast

• Maintain BUY with revised TP of RM17.20 (from RM17.00)

Within expectations. The Group posted 1QFY20 earnings of RM1.33b. This was within ours and consensus' expectations at 27.0% and 23.9% of respective full year estimates.

Earnings pull back on weak income… Net profit fell -5.7%yoy as total income declined -1.9%yoy. The income weakness came from contraction in NII. It fell -2.3%yoy, impacted by the OPR cuts in 1QFY20 which caused NIM compression of -14bp yoy.

…moderated by NOII growth. However, the weak NII was moderated by NOII growth. NOII expanded +5.7%yoy supported by unit trust income and stock broking income which grew +8.4%yoy to RM238.3m and +74.7%yoy to RM38.8m respectively.

OPEX creeping up but still well contained. OPEX grew +8.1%yoy led by increase in personnel cost as it grew +10.1%yoy to RM727.9m. Other costs were well contained though, with establishment cost increasing +3.8%yoy to RM180.3m, admin & general expenses growing +3.9%yoy to RM58.1m and marketing cost declining -2.9%yoy to RM33.2m. In terms of the CI ratio, the Group continues to be the lowest in the industry with 35.7%.

Higher provisions but position well covered. Provisions saw an increase of >100%yoy and +42%qoq. We believe that this could be due to preemptive measures on the back of deteriorating economic conditions. However, we noted that the Group’s position is well covered as loan loss coverage ratio stood at 131.9%.

Asset quality expected to remain strong. The Group GIL ratio was stable at 0.5% as at 1QFY20. We expect that there will be some deterioration in asset quality given the economic impact of the Covid-19 pandemic and the movement control order. Nevertheless, we do not expect a dramatic spike in GIL ratio and the management expect that it will remain manageable.

Decent loans growth despite challenging environment. Group gross loans grew +3.9%yoy to RM332.9b supported by expansion in housing and hire purchase loans. These rose +8.5%yoy to RM124.0b and +2.4%yoy to RM51.6b respectively.

Stable deposits growth. Total deposits grew +3.5%yoy to RM355.1b. However, we expect NII may remain under pressure as fixed deposits grew +5.9%yoy to RM207.3b. Meanwhile, CASA expanded +3.2%yoy to RM90.2b, which may moderate some of the expected impact

No change in earnings forecast. We are maintaining our earnings forecast for FY20, FY21 and FY22 as the Group's result were within expectations.

Valuation and recommendation. Although the Group posted lower earnings, it was within our expectations. It is understandable at current juncture given the OPR cuts and weakened economic conditions. However, we opine that the Group's asset quality and conservative approach to its credit profile will mean that the Group will be able to weather any potential stress to the banking system better. Also, we like the Group borrowers’ profile whereby it is more skewed towards retail segment and we believe that this will ensure asset quality to be more manageable. This is premised on our expectation that SME and corporate segment may be facing more stress comparatively from the MCO. Taking all into consideration, we maintain our BUY call for the stock. We revised our TP to RM17.20 (from RM17.00) as we rollover our valuation to FY21. Our TP is based on PBV of 1.4x.

Source: MIDF Research - 27 May 2020