KEY INVESTMENT HIGHLIGHTS

• Earnings missed expectations again as provisions came in higher than expected
   
• Higher provisions due to credit impairment, macroeconomic factor and management overlay

• NII saw surprise growth but NOII fell

• Cost well contained

• Decent gross loans growth and CASA led deposits growth

• Revision to FY20, FY21 and FY22 earnings forecast

• Downgrade to NEUTRAL with revised TP of RM3.50

Missed expectations again. The Group reported 1HFY20 net profit did not meet expectations. It was below ours and consensus’ estimates coming in at 32.1% and 28.3% of respective full year estimates. The variance was due to higher than expected provisions.

Significant increase in provisions. Group earnings fell -70.9%yoy in 1HFY20, impacted by the severe earnings pull back in 2QFY20 (- 81.6%yoy and -45.4%qoq). Main contributor for the earnings contraction was the significant increase in provisions (+>100%yoy). Provisions were higher due to lumpy credit impairment from account in Singapore amounting to RM950m, macroeconomic factor adjustment of RM470m and management overlay of RM244m. As a result, total provisions were 13ppt higher than our expectations. We expect that credit cost will improve in 2HFY20 and FY21 due to absence of those lumpy credit impairment but will still be elevated. Management is guiding a credit cost of 150bp to 200bp over the next two years.

NII was better than expected despite modification loss. Surprisingly, NII grew +1.4%yoy despite modification loss of RM281m. While NIM contracted -17bp yoy from the policy rate cuts, the main driver for the NII growth was the +3.9%yoy gross loans expansion, and one-off adjustments in 1QFY20 in Thailand.

An outlier to the industry, NOII contracted. NOII fell -27.6%yoy, adding further weight to earnings. Fees and other NOII fell -31.0%yoy to RM1.08b. More worrying in our opinion was the -22.3%yoy contraction to RM786m in trading and FX income. This was an outlier to the industry norm that we have observed thus far. While there was an improvement in trading and FX income of +33.2%qoq to RM449m in 2QFY20, we remain skeptical whether it could recover to provide a boost to total income, as had been for the Group’s peers.

Good OPEX management. One bright spot was the good OPEX management given it fell -3.3%yoy in 1HFY20. Personnel cost decreased -0.8%yoy to RM2.6b, while marketing and admin & general expenses contracted -14.0%yoy to RM135m and -14.4%yoy to RM666m respectively.

Robust gross loans growth. Group gross loans expanded +3.9%yoy to RM369.9b. This was driven by consumer loans growth of +5.4%yoy to RM185.3b and wholesale loans growth of +5.4%yoy to RM119.8b, moderating the -2.4%yoy to RM64.8b contraction in commercial loans. Consumer loans were driven by mortgages which grew +8.8%yoy, +9.2%yoy and +30.5%yoy in Malaysia, Indonesia and Singapore respectively.

CASA led deposits growth. Total deposits grew strongly at +7.8%yoy to RM419.5b. We were pleased that this was led by CASA growth of +20.2%yoy to RM160.3b while fixed deposits rose marginally by +0.3%yoy to RM174.5b. We opine that this is part of the factor for the surprising NII growth.

Asset quality deteriorated. The Group’s GIL ratio went up by +50bp yoy to 3.6% as it continued to be impacted by its oil & gas exposure particularly in Singapore. We expect that asset quality will continue to be under pressure especially post loan moratorium especially given the lack of visibility. However, we should note that it is implementing a Group wide restructuring and rescheduling approach post moratorium.

Downward revision in earnings forecast. In light of the higher credit cost, we are revising our earnings forecast downwards for FY20, FY21 and FY22 by -28.3%, -20.1% and -3.0% respectively.

Valuation and recommendation. The Group’s 1HFY20 performance was disappointing to say the least. We expect some improvement in 2HFY20 but it will not be strong. We continue to be surprised by the credit cost level and expect it to be elevated. However looking ahead, this might mean that there should be an improvement next year. NII growth was a positive surprise but it was tempered by NOII decline. All-in, we believe that earnings potential remains muted for the Group. Hence, we are downgrading our call to NEUTRAL (from TRADING BUY) as we believe all factors have been priced in. We are revising our TP to RM3.50 (from RM3.95) due to the earnings adjustment and pegging a lower PBV of 0.6x (from 0.7x) to its FY21 BVPS. We believe that a lower PBV is justified given the elevated credit cost and the state of its asset quality.

Source: MIDF Research - 1 Sept 2020