KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• Earnings declined due to modification loss in 2QFY20 and additional provisioning set aside for Covid-19 effects.  NOII providing a strong support

• Asset quality improved due to intensive recovery efforts

• Robust loans and deposits growth

• No change to FY20/FY21/FY22 earnings forecast

• Maintain BUY with revised TP of RM5.90

Results within expectations. The Group posted 9MFY20 earnings that were within expectations. It came in at 74.0% and 77.4% of ours and consensus’ full year estimates respectively.

Earnings declined from modification loss and higher provisions. Earnings for 9MFY20 fell -14.0%yoy as it was dragged by modification loss of RM392.4m in 2QFY20 and higher provisions (+164.4%yoy). Excluding the modification loss, earnings would have rose +6.4%yoy suggesting it is resilient despite the tough operating environment.

Earnings improved in the quarter. We noted that earnings improved in 3QFY20 where it grew +55.3%qoq and +1.0%yoy. While there was an absence of the modification loss in the quarter, earnings also improved due to higher income which moderated the year-on-year increase in provisions.

Strong support from NOII. NOII for 9MFY20 grew +23.2%yoy driven by higher investment and trading income, insurance underwriting surplus, brokerage income and wealth management fees. These grew +19.2%yoy to RM723.1m, +8.9%yoy to RM819m, +81.9%yoy to RM275.9m and +12.8%yoy to RM124.7m respectively.

NII saw marginal growth despite OPR cuts. For 9MFY20, NII grew +0.5%yoy despite the OPR cuts. This was due to proactive management of its funding cost as interest expense fell -24.0%yoy to RM2.6b. The strong growth in CASA was a key factor.

Increase in provisions but building up buffer. Provisions in 3QFY20 were still elevated as it rose +190%yoy. However, there was improvement on a sequential quarter basis where it fell -12.6%qoq. The higher provisions were due to building up buffers for Covid-19 impact. For 9MFY20, this totaled RM305m. Meanwhile, on macroeconomic factor adjustment, it amounted to RM160m. As a result, LLC excluding regulatory reserve stood at 108.3%.

Asset quality improved. The Group’s asset quality improved with GIL ratio decreasing -47bp yoy and -18bp qoq. This was due to intensive recovery efforts and the effect of the loan moratorium. We noted that GIL ratio for corporate segment improved -5bp qoq to 1.62%. Nevertheless, we expect it might increase post loan moratorium.

OPEX well contained. OPEX increased by a marginal +0.4%yoy due to lower establishment cost and marketing expenses. These fell -1.6%yoy to RM551.4m and -14.3%yoy to RM155.3m respectively. Meanwhile, personnel cost grew +2.9%yoy to RM1.54b.

Robust gross loans growth. Gross loans grew at faster pace of +5.6%yoy to RM182.4b (vs. +4.9%yoy to RM180.8b as at 2QFY20). It was driven by mortgages which grew +7.9%yoy to RM62.0b. We believe that this was contributed by the PENJANA stimulus. Group business banking loans growth also accelerated to +8.0%yoy to RM28.1b (vs. +6.3%yoy to RM27.3b as at 2QFY20). Meanwhile, loans in Singapore expanded +18.1%yoy to RM14.9b.

Strong deposits growth led by CASA. Total deposits expanded +7.5%yoy to RM196.8b. We were pleased to see that it continued to be led by CASA which grew +32.8%yoy to RM61.6b. Fixed deposits rose +5.2%yoy to RM118.1b. We believe that this had moderated the effect of the OPR cuts which resulted in the measured NIM compression.

Targeted repayment assistance within industry norm. We understand that the targeted repayment assistance and R&R amounted to RM16.5b as at 17 November 2020. This was circa 10% of its domestic loans book and circa 9.0% of total loans book. Main segment that is receiving the repayment assistance is mortgage with RM7.0b.

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

Valuation and recommendation. The Group’s 9MFY20 earnings decline is understandable and within our expectations. However, we continue to like how the Group was able to maintain its performance despite the tough operating conditions which shows resiliency. We believe that the strong growth of its NOII coupled with decent NII allows for the Group to be more conservative in its provisioning. This has led to good build-up in its buffer and suggests that it will be able to weather potential stress better. Furthermore, we expect that the situation is gradually improving especially with the positive development of the vaccine. The current Conditional Movement Control Order is less restrictive than before and should have a moderated impact. Hence, we maintain our BUY call with revised TP of RM5.90 (from RM5.25). We are revising our TP as we peg its FY21 BVPS to a higher PBV of 0.9x (from 0.8x) in light of the expectation of an improving situation.

Source: MIDF Research - 1 Dec 2020