KEY INVESTMENT HIGHLIGHTS

• Results was above expectations as we had overestimated the income attributable to depositors

• Earnings was driven by lower taxation and Bank Islam’s performance

• Better than expected gross financing growth

• Bank Islam managed its cost of fund well

• Revising FY20/FY21/FY22 earnings forecast upwards

• Maintain BUY with revised TP of RM4.25 (from RM4.05)

Above expectations. The Group's 1QFY20 earnings was above ours but within consensus' expectations. Its net profit was 34.6% and 27.3% of our and consensus' full year estimates respectively. The variance was due to our overestimation of the income attributable to depositors.

Driven by lower taxation and to certain extent Bank Islam. The Group saw its net profit growing +3.3%yoy. This was due to lower taxation where it came in -8.4%yoy lower. Bank Islam also contributed marginal as its PBZT expanded marginally by +0.8%yoy to RM221.5m. Meanwhile, PBZT of Syarikat Takaful was almost flat, marginally declining -0.1%yoy to RM114.4m.

Bank Islam boosted by financing growth…Bank Islam PBZT was driven by net income grew +30.2%yoy to RM539.3m as a result of better than expected gross financing growth. It rose +9.5%yoy to RM50.4b; doubled the industry’s loans & financing growth of +4.0%yoy as at 1QFY20. This compensated the decline in average asset rate of - 40bp yoy to 4.99%. We had expected that financing growth to be weak this year given the prevailing cautious sentiment. Nevertheless, expansion in consumer financing segment continued to be strong as it expanded +5.9%yoy to RM37.7b. This was driven by house and personal financing as it grew +7.6%yoy to RM20.6b and +6.4%yoy to RM14.9b respectively. Vehicle financing fell -14.0%yoy to RM1.6b.

…and cheaper cost of funding. Comparing the total deposits and investments accounts (IA) as at 1QFY19 with 1QFY20, Bank Islam posted an increase of +3.1%yoy to RM55.5b. This was due to CASA and transactional IA growth of +13.2%yoy to RM19.9b while non CASA-like deposits fell -1.8%yoy to RM35.6b. As a result average liabilities fell - 19bp yoy to 2.61%. This had moderated the NIM compression to -21bp yoy to 2.38% despite three OPR cuts totaling 75bp over the period.

Asset quality improved. The gross impaired financing (GIF) ratio improved by -12bp yoy to 0.83% as at 1QFY20. This could be the result of the high growth in gross financing and steady profile of its borrowers such as government employees.

Is provisions enough? Meanwhile, total provisions increased +35.6%yoy, leading to credit cost rise of +4bp yoy to 0.24%. This was an outlier when compared against its peers. The question will be is this enough given the impact of Covid-19. We expect that credit cost might rise further but given its borrowers profile, might remain manageable.

Source: MIDF Research - 29 May 2020