KEY INVESTMENT HIGHLIGHTS

• Earnings within expectations
• Cumulative net profit declined but 3QFY20 earnings improved quarter-on-quarter
• Provisions remain elevated
• Gross loans declined but supported by loans growth in Malaysia
• Deposits lead by CASA
• Concern on asset quality especially in Indonesia
• Surprised interim dividend of 13sen
• Maintain NEUTRAL with revised TP of RM8.70

Within expectations. The Group registered 9MFY20 earnings that were within expectations. It came in at 77.3% and 79.3% of ours and consensus’ full year estimate respectively.

Net profit declined from higher provisions and weak NII. The 9MFY20 earnings fell -14.0%yoy as provisions remains elevated. Provisions grew +76.4%yoy over the period. Also contributing to the earnings decline was the contraction in NII which fell -5.3%yoy. However, we note that there was an improvement on a sequential quarter basis in 3QFY20 where earnings grew +107%qoq.

NIM compressed but improved quarter-on-quarter. NIM saw a compression of -27bp in 9MFY20 due to the 125bp OPR cuts, reduction in Sibor by 130+bp, 100bp cut in Indonesia reference rate and the modification loss from the loan moratorium. This led to the NII decline. However, it improved +9bp qoq as cost of fund declined from repricing of deposits and growth in CASA. As such, NII improved on a sequential quarter basis.

Strong support from NOII. NOII in 9MFY20 grew +16.9%yoy due to realized securities disposal gains and mark-to-market derivatives revaluation gains. Investment and trading income grew +32.5%yoy to RM1.96b while derivatives and financial liabilities rebounded to RM830m.

OPEX declined. OPEX was well controlled as it fell -2.8%yoy. This was contributed by fall in personnel cost (-1.4%yoy to RM4.95b), marketing expenses (-40.1%yoy to RM269.3m) and admin & general expenses (- 1.0%yoy to RM1.73b).

Prudent to increase provisions. The higher provisions were due to additional provisioning on macroeconomic variable adjustments and management overlays amounting to RM580m and RM1.5b respectively. The management overlay was for specific business and corporate borrowers in home markets displaying weakness. While we believe that the Group had been prudent to increase its provision levels, we are concern that it is not over. LLC as at 3QFY20 was 97.6%. We expect credit cost to remain elevated and may spill over into FY21. The management maintained its net credit cost guidance of 75bp to 100bp.

GIL ratio reduction on account of slower formation of newly impaired loans write-offs. At first glance, the fall of GIL ratio by -32bp yoy suggested improvement in asset quality. However, this was due to slower formation of newly impaired loans especially during loan moratorium period and higher account write-offs. We note that GIL ratio remains elevated in Indonesia at 5.59% (vs. 4.93% as at 1QFY20 and 6.17% as at 2QFY20). The weakness in asset quality in Indonesia seems to be from most segments which were consumer mortgage, auto finance, credit cards, retail SME and business banking (refer to table 1). It appears to us that its Indonesian market is facing weakness, most likely impacted by the Covid-19 pandemic fallout there. In Malaysia and Singapore, the GIL ratios were 1.57% and 3.36% respectively. Our concern is on asset quality going forward and we opine that there is a possibility that GIL ratio might trend upward especially post loan moratorium and in Indonesia.

Gross loans contracted again. Group gross loans contracted -0.6%yoy to RM521.8b (vs. -1.0%yoy to RM520.2b as at 2QFY20) due to shrinkage of -9.8%yoy to RM89.6b in its international market. Meanwhile, support came from Malaysia where gross loans expanded +5.2%yoy to RM324.2b. In Malaysia, mortgage and auto finance grew +12.2%yoy to 105.6b and +6.5%yoy to RM52.3b respectively due to PENJANA stimulus which drove loans demand. Business banking and SME loans in Malaysia also saw growth of +8.3%yoy to RM46.8b. We opine that this had supported NII in 3QFY20 and with improved NIM may alleviate the weakness in NII.

CASA led deposits growth. The Group saw total deposits grew +4.8%yoy to RM593.2b. We are pleased that CASA growth drove the deposits expansion. We are seeing the positive impact of this with the improved NIM. Group CASA expanded solidly by +27.4%yoy to RM249.6b. Furthermore, this growth made up for the fall in fixed deposits, which contracted -6.5%yoy to RM274.6b. More importantly, CASA growth continued to be registered across all its home markets.

Customer support continues. The ending of the blanket loan moratorium period, we saw an extension on a more targeted approach. In Malaysia, circa 11% of retail customer base are given some form of repayment assistance. Analysing further we noticed that SMEs, business and corporate clients requires the most assistance at current juncture (refer to table 2). Our concern is the possibility that these borrowers will turn non-performing in the coming month given the short term headwinds faced following a resurgence of Covid-19 new cases. We could see the potential impact to asset quality coming from this segment.

Surprised interim dividends in quarter. We were surprised that the Group announced an interim dividend of 13.5sen per share as the normal convention was to announce it in 2QFY20. However, this could be due to the fact no dividend was announced in 2QFY20 and some improvement in the situation. The dividend is fully electable under the Dividend Reinvestment Plan. We are maintaining our dividend expectation of 22sen for this year.

No change to earnings forecast. We are maintaining our earnings forecast given the result were within expectation.

Valuation and recommendation. In our view, there were pockets of improvement such as the improved NIM, while NOII remains strong. The elevated provisions are understandable at current juncture. We expect credit cost will continue to be elevated this year and potentially spill over into FY21. This is especially so post loan moratorium. However, we remain concern in the short term as the resurgence of the Covid-19 new cases may cause further pressure. One of the home markets concerns us the most is Indonesia. Nevertheless, should the Group be able to weather this short term headwinds better than expected, then in our opinion we could look forward to better year in FY21 and FY22 as we expect a more certain economic recovery following the positive development in the vaccine front. In addition, its status as a D-SIB bank will mitigate any downside risk. Hence, we maintain our NEUTRAL call and revise our TP to RM8.70 (from RM7.90) as we increase our PBV to 1.15 (from 1.05x) to reflect the slightly better prospect.

Source: MIDF Research - 30 Nov 2020