KEY INVESTMENT HIGHLIGHTS

• Earnings were below our expectations as provisions were higher than anticipated

• There could be more credit cost post loan moratorium

• Strong PPOP growth from robust NOII and controlled OPEX

• Gross loans contracted

• GIL ratio reduced due to account write-offs

• No dividend in the quarter

• Revising FY20/FY21 earnings forecast downwards by - 8.8%/-2.8%

• Maintain NEUTRAL with revised TP of RM7.80

Below expectations. The Group registered 1HFY20 earnings that were below our expectations, coming in at 42.7% of our full year estimates. However, it was within consensus’. The variance was due to higher than expected provisions.

Net profit declined from increased provisions. The Group’s net profit for 1HFY20 declined -20.2%yoy due to ballooned provisions. Net impairment losses increased >100% with the bulk of it coming in 2QFY20. The higher provisions were due to additional provisioning on macroeconomic variable adjustments and management overlays which amounted to circa RM500m and RM1.0b respectively. The management overlay was for specific business and corporate borrowers in home markets displaying weakness.

Prudent to increase provisions but more could come. While we believe that the Group had been prudent to increase its provision levels, we are concern that it is not over. Our concern stem from the lack of visibility of the situation post loan moratorium. We expect credit cost to remain elevated and may spill over into FY21. The management has maintained its net credit cost guidance of 75bp to 100bp.

Strong PPOP growth. PPOP for 1HFY20 grew +9.9%yoy supported by NOII expansion of +27.8%yoy and disciplined cost management where OPEX was almost flat at +0.3%yoy. The main driver for the NOII growth was from investment and trading income which grew +93.7%yoy to RM1.25b. Bulk of this came in 1QFY20. Meanwhile, the controlled OPEX was contributed by decline in personnel cost in 2QFY20 which fell - 0.8%yoy and -4.8%qoq to RM1.64b. We expect that NOII will continue to be strong in 2H20 which will moderate the increased provisions.

Weakness in NII unsurprising. NII for 1HFY20 fell -3.4%yoy as NIM compressed -15bp yoy. This was unsurprising given the policy rate cuts in the Group’s home market. Furthermore, there were modification loss whereby without it, NIM would have only fell by -7bp yoy. With our expectation that with gross loans likely to be sluggish, we believe that NII will likely remain weak.

Gross loans contracted. Group gross loans contracted -1.0%yoy to RM520.2b due to shrinkage of -8.4%yoy to RM198.1b in its international market. Meanwhile, gross loans in Malaysia expanded +4.4%yoy to RM316.1b contributed by +11.8%yoy to RM102.4b and +1.4%yoy to RM49.4b for mortgages and auto loans respectively. Business banking and SME loans in Malaysia also saw growth of +6.1%yoy to RM45.3b. However, we believe that the loans book expansion was also due to lack of repayments during the loan moratorium period.

GIL ratio reduction on account of write-offs. At first glance, the fall of GIL ratio by -13bp yoy suggested improved asset quality. However, this was due to higher account write-offs. There was a spike in the GIL ratio in Indonesia, where it went from 4.93% as at 1QFY20 to 6.17% as at 2QFY20. Meanwhile, it fell to 1.68% in Malaysia (from 1.96% as at 1QFY20) and to 3.41% in Singapore (from 4.04% as at 1QFY20). We opine that there is a possibility that GIL ratio might trend upward post loan moratorium. However, as with credit cost, there seem to be lack of visibility.

Focus on CASA. The Group saw total deposits grew +2.2%yoy to RM573.3b. We are pleased that CASA growth continues to be a focus for the Group. This will moderate any NII weakness. Group CASA expanded solidly by +17.8%yoy to RM230.6b. Furthermore, this growth made up for the fall in fixed deposits, which contracted -7.5%yoy to RM270.0b. More importantly, CASA growth was registered across all its home markets.

No dividends in quarter. We were surprised that the Group did not announce any dividends this quarter as had been its norm for the past few years. In our opinion, this could be due to the uncertain conditions and possibly the management’s intention to preserve capital in light of this. Hence, we are slashing our dividend expectations to a payout ratio of 40% which is the lower bound of its dividend policy.

Adjustment to earnings forecast. We are revising downwards our FY20 and FY21 earnings forecast by -8.8% and - 2.8% respectively to reflect the increased credit cost, imputing a credit cost of 90bp and 70bp respectively.

Valuation and recommendation. In our view, we are starting to see the impact of the Covid-19 pandemic and the implementation of the movement control order to the Group earnings in 2QFY20. We expect credit cost will continue to be elevated this year and potentially spill over into FY21. This is especially so post loan moratorium. However, NOII will moderate this impact, and the weakness in NII. Most of all, we are disappointed that there were no dividends in the quarter as per norm in previous years. This concerns us as there could be a possibility that dividends will be lower than expected. Nevertheless, its status as a D-SIB bank will mitigate any downside risk. Hence, we maintain our NEUTRAL call and revise our TP to RM7.90 (from RM8.20) given the adjustment to earnings. Our valuation is based on PBV 1.1x which take into account the current challenging climate.

Source: MIDF Research - 28 Aug 2020