KEY INVESTMENT HIGHLIGHTS

• Earnings within our expectation but above consensus’
• Cumulative earnings declined but improved in 3QFY20
• NII showing improving
• NOII providing strong support
• Increased provisions due to preemptive measures
• Asset quality remains strong
• Acceleration in gross loans growth
• Deposits growth moving in tandem with loans growth
• No change to earnings forecast
• Upgrade to BUY with revised TP of RM20.50

Within our expectation. The Group’s 9MFY20 earnings came in within our expectation at 75.7% of our full year estimate. However it was above consensus at 81.7% of consensus’ full year estimate.

Cumulative earnings declined but improving. Net profit for 9MFY20 fell -9.3%yoy. As we had expected, the earnings contraction was due to a combination of NII decline and higher provisions. However, we noted that earnings have begun improving. The Group’s 3QFY20 net profit grew +39.0%qoq and +2.2%yoy despite higher provisions. This was supported by robust income growth and lower OPEX in the quarter

NII improved in the quarter. For 9MFY20, NII declined -6.8%yoy due to the 125bps OPR cuts and the modification loss following from the loan moratorium. However, 3QFY20 showed improvement as it grew +27.4%qoq and +0.7%yoy. This was due to better cost of fund coming from the strong CASA growth. Interest expense in 3QFY20 fell - 28.8%yoy to RM1.58b.

NOII providing strong support. NOII expanded strongly by +17.8%yoy in 9MFY20. Main drivers were growth in unit trust income, stockbroking income and gains on financial instruments. These grew +12.3%yoy to RM763.9m, to RM173.0m from RM67.8m and to RM412.3m to RM133.8m. This had provided strong support to the Group earnings thus far, and we believe will continue in the next quarter.

Higher provisions from preemptive measures while position continues to be well covered. Provisions for 9MFY20 increased almost 4 fold due additional provisions from deterioration in macroeconomic factor and preemptive measures by the management. However, we like the fact that the Group is being prudent given the uncertainties especially with the reimplementation of the Conditional Movement Control Order (CMCO). We noted that the Group’s position is well covered as loan loss coverage ratio stood at 209.1% as at 3QFY20 (from 158.7% as at 2QFY20). We believe that this is important as it provides strong buffers should the situation worsen post loan moratorium. We expect that credit cost will remain elevated. For FY20, management are guiding increased credit cost of 30-35bps from earlier guidance of 20-25bp.

Strong asset quality. We were surprised to see the Group’s GIL ratio improving again to 0.3% (from 0.4% as at 2QFY20). However, this was due to the loan moratorium period and 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 given the targeted assistance programme and the recently announced extension to this programme for the B40 and M40. We believe that it will remain manageable especially as the management is actively engaging with its potentially troubled borrowers to reschedule or restructure their loans.

Gross loans grew at faster pace. Group gross loans growth accelerated to +4.6%yoy to RM342.3b from +3.4%yoy to RM334.6b as at 2QFY20. While this was partly due to the lack of repayment coming from the loan moratorium, we understand that there was an uptick in loans demand especially with the PENJANA stimulus. Mortgage led the gross loans growth as it expanded +8.3%yoy to RM128.8b, supported by hire purchase loans where it rose +4.7%yoy to RM53.6b. We expect that loans growth will come in stronger in FY21 in tandem with the recovery in GDP.

Deposit grew in tandem with gross loans growth. Total deposits grew +4.8%yoy to RM363.8b (vs. +3.1%yoy to RM360.0b as at 2QFY20). We were pleased that this was led by CASA as it expanded strongly by +17.2%yoy to RM103.5b. Meanwhile, fixed deposits grew +3.3%yoy to RM204.4b. This should further ease some of the pressure to NIM.

No change in earnings forecast. We are maintaining our earnings forecast as the Group's result were within expectations.

Valuation and recommendation. The Group’s lower earnings were within our expectations given the multiple OPR cuts and uncertain economic conditions. However, we believe that its performance is improving as highlighted by the higher income on a sequential quarter basis. Furthermore, the Group is preparing for any eventualities post loan moratorium with the preemptive provisions. 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 short-term stress. It had significantly raised its LLC, and this provides us comfort in light of the lack of visibility on asset quality post loan moratorium. With the expectation that the situation is turning around especially on the positive development of the Covid-19 vaccine and recovery in the GDP, we are upgrading our call to BUY (from NEUTRAL) with revised TP of RM20.50 (from RM17.20) as we pegged its FY21 BPS to higher PBV of 1.7x (from 1.4x). We are increasing our PBV due to the improving situation

Source: MIDF Research - 30 Nov 2020