KEY INVESTMENT HIGHLIGHTS

• Results were below expectations due to higher provisions and higher OPEX
• Provisions were higher as the Group was building buffer
• Higher OPEX due to equity trading incentives
• Strong NOII gave support to earnings
• GIL ratio improved
• Gross loans shrank and deposits fell but due to FD decline
• Revising FY20 = earnings forecast downwards by -19.2%
• Maintain NEUTRAL with unchanged TP of RM1.57

Below expectations. The Group posted 9MFY20 earnings that were below expectations. It came in at 60.1% and 66.2% of ours and consensus’ full year estimate respectively. The variance was due to higher than expected OPEX and provisions.

Earnings decline due to higher provisions... The Group’s earnings for 9MFY20 fell -34.5%yoy. This was due to higher provisions from the impact of the Covid-19 pandemic. However, we do not view this as completely negative as it was to increase LLC, which stood at 61.3% excluding regulatory reserve from 50.9% as at the previous quarter.

…and higher OPEX. OPEX grew +27.7%yoy due to equity trading incentives. Personnel cost went up by +39.5%yoy to RM845.9m.

Strong NOII moderated earnings decline. The Group saw a very strong income growth of +27.2%yoy for 9MFY20. This was despite the modification loss. Main driver for the strong income growth was solid Islamic banking income (+16.6%yoy) and most notably NOII which grew +77.3%yoy. This was due to higher trading income which rose to RM635.9m (from RM232.0m in 9MFY19).

GIL ratio improved. GIL ratio saw an improvement of -56bp yoy due to recovery efforts. However, we expect that asset quality remains fragile given the ending of the loan moratorium period.

Gross loans remains on downtrend. As at 3QFY20, the Group’s gross loans contracted -1.5%yoy to RM45.9b. However, this was at slower pace than the -5.4%yoy to RM45.0b posted as at 2QFY20. This was mainly due to rebalancing difficulties in building its loans book during lockdown. Nevertheless, mortgage loans grew +5.2%yoy to RM12.1b possibly due to the PENJANA stimulus.

Lower FD led to lower deposits. Total deposits saw contraction of - 13.0%yoy to RM49.5b. We are pleased that the contraction in deposits came from lower fixed deposits (FD) which fell -20.7%yoy to RM36.3b. CASA jumped +21.4%yoy to RM10.2b which should provide some support to NIM given the OPR cuts seen this year.

Revising forecast downwards. In view of the higher provisions and OPEX, we revise our FY20 earnings forecast downwards by -19.2%

Valuation and recommendation. As we had expected, provisions (due to the impact of Covid-19) continue to weigh down earnings. We expect the elevated provisions will continue in 2HFY20 and our concern will be the effect of the ending of the loan moratorium. However, we do not view this as entirely negative given that the Group is building its LLC. Furthermore, we expect that NOII will moderate the increase in provisions. All-in, we are maintaining our NEUTRAL call for the stock, with unchanged TP of RM1.57 as we peg its FY21 BVPS to 0.33x PBV

Source: MIDF Research - 30 Nov 2020