KEY INVESTMENT HIGHLIGHTS

• Results was above our expectations as we overestimated the provision level

• Net profit declined from high credit cost, with additional in 4QFY20 from Covid-19 impact

• NOII was the driver of net income growth

• Pace of gross loans growth slowed; deposits growth strong

• Asset quality deteriorated

• No dividend to preserve capital

• Maintain NEUTRAL with unchanged TP of RM2.05

Above our expectations. The Group registered FY20 net profit which was above our expectations at 120% but within consensus’. The variance was due to our overestimation of the provisions as we had expected deeper credit cost due to Covid-19. However, FY20 earnings did decline by -21.1%yoy due to high provisions.

Another quarter of high provisions. Earnings in 4QFY20 continued to be weighed down by provisions which grew +100.9%yoy and +213.1%yoy. This lead to FY20 credit cost to come in at 72bp. The group had booked a credit cost of 8bp for early assessment of the Covid-19 impact, where 5.2bp was from deterioration in macroeconomic variable and 2.8bp for personal finance delinquency in anticipation of the loan moratorium.

Net income came within expectation. Net income for FY20 grew +4.1%yoy which was within our expectation. Main driver for the net income growth was NOII which, inclusive of Islamic banking base, grew +25.2%yoy to RM365.8m. The growth was due to higher treasury and investment income, where there was RM20.4m gain. The group also saw higher wealth management & banking services of +RM24.8m.

NII marginally declined from NIM compression. NII (including Islamic fund based income) marginally declined by -0.5%yoy to RM1.32b. Main drag to NII was NIM compression following from OPR cuts which impacted NIM by -9bp.

Gross loans growth slowed. Pace of gross loans growth slowed to +2.2%yoy to RM43.7b. In fact, gross loans were almost flat on a sequential quarter basis due to Covid-19 impact. In terms of segments, consumer banking and SME banking grew +2.8%yoy to RM23.2b and +7.6%yoy to RM9.4b respectively. However, corporate banking declined -3.3%yoy to RM11.0b.

Asset quality deteriorated. GIL ratio went up +90bp yoy due to worsen asset quality in residential segment. GIL ratio in classic mortgage and AOA mortgage increased +0.9%-pt to 1.9% and +3.7%- pt to 5.3%. We believe that this is a worrying trend. We expect asset quality will continue to be under pressure in FY21.

Customer deposits saw strong growth. Customer based funding grew +6.5%yoy to RM48.9b. CASA showed strong expansion of +13.6%yoy to RM17.4b which moderated the NIM compression. However, we believe that the CASA expansion was due to savers ensuring sufficient liquidity during a time of uncertainty.

No change to earnings. We maintaining our FY21 earnings forecast for now, pending a briefing from the management today.

Valuation and recommendation. We believe that the group will continue to face pressure in terms of NII and asset quality in FY21 as the impact of the movement control order and Covid-19 manifest further in the coming quarters. There is potential that credit cost and GIL ratio might spike up after the end of the loan moratorium period. However, we expect the economic situation will start to improve in 3QFY21 and this should curb some of the downside risk. All-in, we are maintain our NEUTRAL call on the stock with unchanged TP of RM2.05. We pegged its FY21 BVPS to 0.5x PBV.

Source: MIDF Research - 26 Jun 2020