KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• Strong PPOP growth but moderated by higher provisions

• As a result, net profit declined -10.0%yoy

• NIM improved but NII declined as gross loans contracted

• Deposits continue to be led by fixed deposits but rate could have been lower

• GIL ratio improved but remains elevated

• No change to earnings forecast

• Maintain NEUTRAL with revised TP of RM1.65 (from RM1.55)

Within expectations. The Group posted an earnings of RM123.6m in 1QFY20, which was within expectations. It came at 26.7% and 23.2% of ours and consensus’ estimates respectively.

Strong income performance…The Group saw a very strong income growth of +33.4%yoy resulting PPOP to expand +77.4%yoy. Main driver was NOII which grew +80.6%yoy. The sharp increase in NOII was due to gains in financial instruments which came in at RM207.6m vs. RM71.5m in 1QFY19. We believe that this could be the result of treasury activities which took advantage of the fall in MGS and GII yields in the quarter.

…moderated by provisions. However, despite the strong PPOP growth, net profit declined -10.0%yoy. Income growth was moderated by a rise in provisions which came in at RM118.1m. Comparatively, there was a net write back of RM9.9m in 1QFY19. We understand that this was to build up the Group’s LLC. Also, we opine that this was a deliberate decision to be more prudent to take into account the expected economic fallout from the Covid-19 pandemic and movement control order (MCO) imposed.

NIM improved but NII declined. NII (including Islamic banking income) fell -2.5%yoy to RM293.1m. This was despite NIM improving +25bp as the Group managed to lower its funding cost. We believe that the contraction in NII was due to lower gross loans growth.

Gross loans contracted due to HP. Gross loans fell -4.0%yoy to RM24.2b. This was due to a contraction in hire purchase loans of - 14.9%yoy to RM10.3b on higher repayments. However, the rise in mortgages of +7.3%yoy to RM11.8b was able to moderate this decline.

Better fixed deposits rate? Total deposits grew +6.2%yoy to RM20.7b led by fixed deposits (FD) which expanded +6.2%yoy to RM20.7b. However, the fact that NIM improved led us to postulate that the Group managed to take advantage of the OPR cuts in the quarter to book in FDs with lower rates. CASA growth was higher at +8.8%yoy and remains the primary focus for the Group. However, with a balance of RM3.7b, we believe it has yet to be impactful.

GIL ratio improved but remains elevated. GIL ratio saw an improvement of -20bp yoy. However, we believe that it remains elevated at 3.11%.

Source: MIDF Research - 1 Jun 2020