KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• Earnings dragged by modification loss and additional provisioning set aside for Covid-19 effects.

• Net fund based income grew despite multiple OPR cuts

• Non-fund based income provided boost

• Robust loans and deposits growth

• Asset quality improved

• No change to FY20/FY21/FY22 earnings forecast

• Maintain BUY with unchanged TP of RM5.25

Results within expectations. The Group posted 1HFY20 earnings that were within expectations. It came in at 45.1% and 47.2% of ours and consensus’ full year estimates respectively.

Earnings affected by modification loss and higher provisions. Earnings for 1HFY20 fell -22.0%yoy as it was dragged by modification loss of RM392.4m and higher provisions (+114.9%yoy). Excluding the modification loss, earnings would have rose +1.0%yoy suggesting some resiliency despite the tough operating environment.

Set aside additional provisions. Credit cost increased +20bp yoy for 1HFY20. Nevertheless, this was mainly due to the Group setting aside an additional RM90m in provisions for Covid-19 effects, while there was RM160m adjustment made for macroeconomic factors. In our opinion, this was prudent move. Nevertheless, we expect provisions will remain elevated in 2HFY20 and into FY21.

Net fund based income growth despite OPR cuts. Net fund based income grew +3.5%yoy to RM2.5b. We believe that this was commendable given the multiple OPR cuts. In fact, NIM compressed by - 5bp yoy only. This was due to proactive cost of fund management. Interest expense fell -18.3%yoy to RM1.9b.

Boosted by non-fund based income. Non-fund based income (inclusive of Islamic non-fund based income) grew +9.8%yoy to RM1.2b. This was due to gains in investment and trading income of +49.6%yoy to RM410.2m and brokerage income growth of +54.3%yoy to RM176.7m. We expect non-fund based income to continue supporting earnings in 2HFY20.

Good OPEX management. OPEX fell -1.2%yoy due to lower establishment cost and marketing expenses. These fell -1.7%yoy to RM384.8m and -21.2%yoy to RM99.5m respectively. Meanwhile, personnel cost was well contained; grew +1.1%yoy to RM1.04b.

Robust gross loans growth. Gross loans grew +4.9%yoy to RM180.8b. It was driven by mortgages (+7.1%yoy to RM60.3b) which supported retails as other segments saw decline. Group business banking saw growth as well with +6.3%yoy to RM27.3b. Meanwhile, Singapore expansion of +20.4%yoy to RM14.9b.

Strong deposits growth led by CASA. Total deposits expanded +7.8%yoy to RM199.4b. More importantly, it was led by CASA which grew +15.7%yoy to RM56.9b. Fixed deposits rose +5.9%yoy to RM121.2b. We believe that this had moderated the effect of the OPR cuts which resulted in the minor NIM compression and the net fund based income performance.

Asset quality remained stable thus far. The Group’s asset quality improved with GIL ratio decreasing -28bp yoy and - 13bp qoq. Nevertheless, we expect it might increase in the coming quarters especially with post loan moratorium.

No dividend to preserve capital. The Group did not announce any interim dividend to preserve capital in light of the uncertain conditions. We leave our dividend forecast unchanged as we believe we are already conservative in our estimate.

No change in earnings forecast. We make no changes to our earnings forecast as the results were within expectation.

Valuation and recommendation. We continue to like how the Group was able to maintain its performance despite the tough operating conditions. The 1HFY20 earnings decline is understandable and within our expectations. However, what stood out for us was the growth in net fund based income. We believe that this allows for the Group to be more conservative in its provisioning and suggest that it will be able to weather potential stress better. All-in, we believe that the fundamental of the Group remains intact. We maintain our BUY call with unchanged TP of RM5.25. Our TP is based on PBV of 0.8x pegged to its FY21 BVPS.

Source: MIDF Research - 1 Sept 2020