KEY INVESTMENT HIGHLIGHTS

• Visibility on asset quality is still low due to increased uncertainty
• New “lockdowns” is a concern but impact will likely be less than before
• Top line seems to have improved in 3QFY20
• Goodwill write-off a possibility
• Maintain FY20, FY21 and FY22 forecast  
• Maintain NEUTRAL with unchanged TP of RM3.50

New concerns. The Group CFO gave us an update yesterday. Below are the key take away:

• Visibility is still low in terms assessing its asset quality, especially the recent surge in Covid-19 cases and governments’ response
• Provisions expected to remain elevated in 3QFY20
• Top line for 3QFY20 looked decent. Plan to grow NOII at faster pace than NII for Forward23+ (F23+)

Still low visibility on asset quality. The management indicated that the visibility in terms on providing definitive guidance is still low. While it has been almost a month since the end of the loan moratorium in Malaysia, the current surge in Covid-19 pandemic domestically and globally results in a very fluid situation. The management is concern on governments’ response to this surge with possibility of renewed lockdowns. This will affect employment and businesses, which may lead to currently untroubled borrowers to require assistance.

It will not be the same situation as before. Nevertheless, we believe that there will not be a repeat of the situation in March and April this year, where we were in the Movement Control Order (MCO) and majority economic activities halted. Asset quality may deteriorate further from the “lockdowns” but we opine that it will be more limited, as the current Conditional Movement Control Order (CMCO) is less restrictive and more targeted.

Provisions will remain elevated. The management guided that provisions will remain elevated in 3QFY20. This will be due to forward looking adjustments as we had observed in the previous quarter. The management will include a management overlay to credit cost. Also, there will be “top up” provisions for legacy accounts in Indonesia and Singapore following from the surge in Covid-19 new cases globally. This is in line with our expectation but we expect it will slightly improve in 2HFY20 and FY21 due to absence of lumpy credit impairment seen in 1HFY20. Management is guiding a credit cost of 150bp to 200bp over the next two years

Overall NIM stable for 3QFY20. Overall, NIM for the Group seems stable for 3QFY20. In Malaysia, there could be an improvement on a sequential quarter basis. This is due to the fact that there will not be a repeat of the modification loss seen in 2QFY20. Also, the continued CASA growth and repricing of deposits from the OPR cuts will provide boost to NIM. Similarly, NIM in Thailand is stable while it is turning around in Singapore. However, NIM might face compression pressure in Indonesia as there is a lag effect to the rate cuts there and an underlying yield pressure.

NOII could come in higher. NOII could also see an improvement in 3QFY20. We understand that this will come from Treasury and Market operations. In the recently released F23+ plan by the Group, it is planning to grow NOII at a faster pace than NII on a CAGR basis. However, this does not entail taking unnecessary risk. We understand that it will be via strengthening the Treasury and Market operations in Singapore and Indonesia and focusing on growing its wealth management business.

Goodwill write-off a possibility. One possibility that the management is considering is the write-off of its goodwill. The goodwill had been accumulated through its acquisitions over the years. Given this, the Group may write-off its goodwill in stages. This could give an immediate uplift in ROE and increase the possibility of a higher dividend payout or removing its Dividend Reinvestment Scheme in later years.

No change in earnings forecast. We are maintaining our earnings forecast as the Group will be releasing its result next month.

Valuation and recommendation. We recognize the headwinds that the Group will be facing this year and next in light of the Covid-19 pandemic. We expect that credit cost might remain elevated up until 1HFY21 especially with low visibility on asset quality and resurgence in Covid-19 new cases. We will continue to monitor asset quality closely to see the impact post loan moratorium. However, we do believe that the Group will be facing current headwinds in the position of strength given the build-up of capital over the years. Moreover, we believe that since the Group is a Domestic Systemically Important Banks, it might be supported. Therefore, we maintain our call NEUTRAL with unchanged TP of RM3.50 based on pegging our FY21 BVPS to PBV of 0.6x. Although the expected total returns of the Group is more than 10% which should require us to upgrade our call, we are maintaining it at current juncture. This is due to our cautious stance in regards to the Group’s asset quality. We do not discount the possibility of revision in earnings forecast after the release of its 3QFY21 result which will lead to an adjustment to our TP.

Source: MIDF Research - 28 Oct 2020