KEY INVESTMENT HIGHLIGHTS

• Results were below expectations due to modification loss
• Strong income growth moderated higher provisions
• Net profit declined -34.9%yoy
• GIL ratio improved but remains elevated
• Gross loans shrank due to portfolio rebalancing.
• In tandem, deposits fell but driven by FD
• Tweaking FY20 and FY21 earnings forecast downwards by - 13.9% and -7.7% respectively
• Maintain NEUTRAL with revised TP of RM1.57 (from RM1.65)

Below expectations. The Group posted 1HFY20 earnings of RM191m which was below our expectations but within consensus’. It came at 41.2% of ours estimates. The variance was due to modification loss of RM79.7m.

Earnings decline due to higher provisions. The Group’s earnings for 1HFY20 fell -34.9%yoy. This was due to higher provisions from the impact of the Covid-19 pandemic. We expect provisions will remain elevated for FY20, especially post loan moratorium. Meanwhile, an increase in OPEX was also a contributing factor with higher personnel linked to trading performance and IT consultancy fee.

Strong income performance moderated earnings decline. The Group saw a very strong income growth of +49.2%yoy for 1HFY20. This was despite the modification loss. Main driver for the strong income growth was solid Islamic banking income (+17.3%yoy) and higher than expected gains from financial instrument (+>100%yoy). This had moderated the dragging factors to earnings.

GIL ratio improved further but remains elevated. GIL ratio saw an improvement of -43bp yoy. However, we believe that it remains elevated at 3.06%. We expect that asset quality remains fragile at current juncture as the end of the loan moratorium nears.

Gross loans continue to trend downwards. As at 1HFY20, the Group’s gross loans contracted -5.4% to RM45.0b. This was mainly due to rebalancing of portfolios. It saw auto loans and loans to businesses declining -14.7%yoy to RM9.97b and -7.5%yoy to RM21.0b respectively. Mortgage loans moderated this by increasing +1.8%yoy to RM11.3b.

Deposits contracted due to lower FD. In tandem with the reduction in gross loans, deposits saw contraction of -18.5%yoy to RM48.3b. We are pleased that the contraction in deposits came from lower fixed deposits (FD) which fell -23.0%yoy to RM36.3b. CASA jumped +16.3%yoy to RM9.6b. This should provide some relief to NIM given the OPR cuts seen this year.

Maintaining forecast. In view of the modification loss, we are tweaking our FY20 and FY21, earnings forecast downwards by -13.9% and -7.7% respectively.

Source: MIDF Research - 26 Aug 2020