KEY INVESTMENT HIGHLIGHTS

• Earnings for 1HFY20 within expectations

• Net profit declined from lower income and higher provisions

• NOII moderated weakness in NII

• Higher provisions from change in macroeconomic factors and management overlay

• Asset quality remained strong

• Loans growth decent and deposits grew in tandem

• No interim dividend

• Tweaking FY21 earnings downwards by -5.6%

• Maintain NEUTRAL with unchanged TP of RM17.20

In-line with expectations. The Group’s 1HFY20 earnings came in within ours and consensus' expectations at 47.4% and 51.3% of respective full year estimates.

Earnings declined on weak income and higher provisions. Net profit for 1HFY20 fell -15.0%yoy. As we had expected, the earnings contraction was due to a combination of total income decline and higher provisions.

NOII growth moderated NII decline. NII came in lower by - 10.6%yoy due to the multiple OPR cuts which led to a NIM compression of -33bp yoy. This also included modification loss of RM498.4m. Excluding this, NIM compression would have been -13bp yoy. However, NOII growth of +8.2%yoy moderated the weak NII. This was due to its trading income book which rose to RM288.9m from RM113.3 in 1HFY19. We expect this trend to continue in 2HFY20 before NII recovery in FY21.

Higher provisions but position continues to be well covered. Provisions for 1HFY20 increased to RM215.1m from RM62.0 in 1HFY19. This was due to additional provisions from deterioration in macroeconomic factor and preemptive measures by the management. However, we noted that the Group’s position is well covered as loan loss coverage ratio stood at 158.7% as at 2QFY20 (from 131.9% as at 1QFY20). We believe that this is important given the unclear visibility on asset quality and provisions post loan moratorium. We expect that credit cost will remain elevated for 2HFY20 and FY21. Management are guiding credit cost of 20-25bp for FY20.

Decent loans growth. Group gross loans grew +3.4%yoy to RM334.6b, a moderation from the +3.9%yoy expansion to RM332.9b seen in 1QFY20. This was partly due to the lack of repayment coming from the loan moratorium. However, there was some growth in gross loans that was supported by expansion in housing loans. This rose +8.1%yoy to RM125.7b. We expect that loans growth will continue to be sluggish this year, but will likely recover in FY21 in tandem with GDP.

Deposit growing in tandem. Total deposits grew +3.1%yoy to RM360.0b. We were pleased that this was led by CASA as it expanded +9.6%yoy to RM96.7b. Meanwhile, fixed deposits grew +4.2%yoy to RM204.8b. This should ease some of the pressure to NIM.

Asset quality remained strong. We were surprised to see the Group’s GIL ratio improving to 0.4% (from 0.5% as at 1QFY20). However, we expect that there will be some deterioration in asset quality post loan moratorium. Nevertheless, we do not expect a dramatic spike in GIL ratio and it will remain manageable especially as the management is actively engaging with its potentially troubled borrowers to reschedule or restructure their loans.

No interim dividend. We were disappointed that the Group did not announce an interim dividend as per its usual practice. The management indicated that it wanted to preserve capital despite having strong capital ratios. We understand that the Group will evaluate its position at the end of the year before declaring any dividends. AS such, we are slashing our dividend expectations to 60sen for this year.

No change in earnings forecast. We are maintaining our earnings forecast for FY20 as the Group's result were within expectations. However, we are tweaking FY21 earnings downward by -5.6% as we expect provisions to remain elevated.

Valuation and recommendation. The Group’s lower earnings were within our expectations given the multiple OPR cuts and uncertain economic conditions. However, we opine that the Group's asset quality and conservative approach to its credit profile will mean that the Group will be able to weather any potential stress. Furthermore, it had significantly raised its LLC, and this provides us comfort in light of the lack of visibility on asset quality and provisions post loan moratorium. Taking into consideration the expectation of continued NII weakness but moderated but strong NOII, and the strong LLC, we maintain our NEUTRAL call for the stock with unchanged TP of RM17.20. Our TP is based on pegging PBV of 1.4x to its FY21 BPS.

Source: MIDF Research - 1 Sept 2020