While loans look challenging, growth will be supported by better NIM and better credit charge ahead. Given that compliance on net stable funding ratio (NSFR) is attained, lower funding cost and credit charges will support earnings ahead with opex expected to taper given the completion of its strategic initiatives. BUY with TP at RM2.45 based on FY20 target PBV of 0.49x to account for its abysmal loans.

Management alluded to the decline in loan book as a strategic initiative to rebalance its loans portfolio - as big repayments came on stream with poor disbursements given the challenging environment plus low utilization. Moving forward, focus will be on higher yielding assets - Personal Use and Credit Cards.

While previously Corporate/Consumer portfolio was at 60/40, a rebalancing is in the offing on SME/Corporate/Consumer of 10/40/50 with SME targeted to attain 15% in 2 to 3 years’ time. Its Islamic financing will be at 40% of total loans. With its Transformation Initiatives in place enhancing products and experience, these will add traction to growth in such segments (Household and SMEs). We, however, pencilled in a conservative +4% growth given the challenging environment.

The continued compression in NIM is not a surprise given the lag in re-pricing of deposits. Management gave an indication of a +10bps NIM for FY20 given the focus on higher yielding assets. NIM compression is not anticipated given the moderate credit demand expected plus with its low LDR and Loan to Fund Ratio (LTF) at 82% and 75%.

Asset quality was mixed as gross impaired loans (GIL) surged 60bps to 3.5% with credit charge recorded at 2bps (or RM7m). Excluding the restructured & rescheduled (R&R) loans, net impaired loans ratio GIL would have been at 2.6%. The high GIL was due to unresolved accounts (O&G and Real Estate) of which management are confident of resolving thus will push GIL down to 2.5%. Despite the large impaired loans, we take comfort that gross credit charge have been low averaging 12bps vs. average credit recovery of 8bps. Given this operational efficiency (with no systemic risk seen from asset quality), management revised its credit charge guidance to 15-20bps and we understand this will be the normalised charge going ahead.

Source: Rakuten Research - 2 Dec 2019