KEY INVESTMENT HIGHLIGHTS

• Earnings missed expectations again as provisions continue to surprise on the downside
• Higher provisions due to credit impairment, macroeconomic factor and management overlay
• Asset quality is a concern
• Pace of gross loans growth slowed and CASA led deposits growth
• Revision to FY20 earnings forecast downwards by -25.3%
• Maintain NEUTRAL with unchanged TP of RM3.50

Keep missing expectation. The Group reported 9MFY20 net profit did not meet expectations again. It was at 55.9% and 49.4% of our and consensus’ full year estimates respectively. The variance was due to continued higher than expected provisions.

Provisions increased further. For 9MFY20, the Group earnings fell - 75.3% as provisions in 3QFY20 increased from the previous quarter. Provisions in the quarter rose +249%yoy and +17.1%qoq as the Group continued to add a management overlay in preparation of any fallout from the Covid-19 pandemic. However, we noted there was also a provision for debt instrument amounting to RM221m in quarter. Cumulatively, 9MFY20 saw provisions amounting to RM4.54b with management overlay amounting to RM738m, Covid-19 related provisions amounting to RM459m and provisions on debt instruments and other assets amounting to RM467m. There was also a spike in provisions to RM2.76b from RM1.03b due to specific credit impairments. Nevertheless, LLC increased to 93.9%, increasing its coverage. Management is guiding a credit cost of 140bp to 150bp for FY20.

Asset quality improved but remains a concern. The Group’s GIL ratio improved by -20bp yoy to 3.4%. However, we remain concern on the Group’s asset quality especially for its oil & gas exposure. The oil & gas sector made up of 2.5% of total loans book but it had 38% of this classified as impaired. Furthermore, oil traders made up 10% of its oil & gas loans book. Given the problem faced by oil traders this year, we opine that there is potential for asset quality to deteriorate further. However, we note that impairment coverage ratio stood at 90% for this segment.

NII providing some support. NII grew marginally by +0.7%yoy despite modification loss in 2QFY20 as NIM recovered in 3QFY20. NII in 3QFY20 rebounded on sequential quarter basis but this was due absence of the modification loss.

NOII still show contraction. NOII fell -21.7%yoy which we believe is an outlier in the industry as almost all of the Group peers saw NOII expansion. However, there was a recovery in 3QFY20 as it grew +32.9%qoq. This was due to recovery in trading & FX activity and fees, which grew +47.4%qoq to RM662m and +19.3%qoq to RM575m respectively. Nevertheless, we remain skeptical whether it could recover to provide a boost to total income, as had been for the Group’s peers.

OPEX continued to be managed well. OPEX fell -5.5%yoy from lower personnel, marketing and admin & general expenses. These declined -3.5%yoy to RM3.93b, -40.2%yoy to RM162m and -13.5%yoy to RM1.05b respectively. We opine that this had been one of the bright spot.

Paced of gross loans growth slowed. Group gross loans expanded at a slower pace of +1.6%yoy to RM366.4b. Comparatively group gross loans expanded +3.9%yoy to RM369.9b as at end 2QFY20. Main driver was consumer loans which grew +3.5%yoy to RM186.9b. In terms of markets, it was led by Malaysia which saw growth of +5.9%yoy to circa RM227b, most likely due to PENJANA stimulus. Meanwhile, commercial and wholesale loans contracted -0.9%yoy to RM63.8b and -0.1%yoy to RM115.7b respectively.

Deposits growth led by CASA. We believe the other bright spot had been the strong CASA growth. Total deposits grew +6.1%yoy to RM417.7b with CASA expanding +23.6%yoy to RM166.3b. Fixed deposits declined by -6.8%yoy to RM164.1b. We opine that this is part of the factor for the stable NII.

Post loan moratorium period seems manageable for now. The targeted assistance programme and R&R comprised of 9.8% of total Malaysia loans book and 6.4% of total Group loans book. In relation to Malaysia loans, the majority comes from commercial and corporate segment whereby it constitutes 16.0% and 10.9% of total Malaysia loans book. For now it seems that the post loan moratorium period appear to be stable. However, we are monitoring the situation closely especially from the commercial and corporate segment given the reimplementation of the Conditional Movement Control Order.

Downward revision in earnings forecast. In light of the higher credit cost, we are revising our earnings forecast downwards for FY20 by -25.3% but are maintaining our forecast for FY21 and FY22.

Valuation and recommendation. The Group’s 1HFY20 performance continued to disappoint. We did expect some improvement in 2HFY20 but it was not forthcoming as provisions continue to be elevated. However, it could be also a case of taking advantage of the weak performance this year to increase the provisions and coverage levels. Looking ahead, this might mean that there should be an improvement next year. Nevertheless, there are still some headwinds in the short term especially with the resurgence of the COvid-19 new cases. All-in, we believe that earnings potential remains muted for the Group. Hence, we are maintaining our NEUTRAL call. We are maintaining our TP of RM3.50 as we peg its FY21 BVPS to PBV of 0.6x.

Source: MIDF Research - 30 Nov 2020