Loans growth will be challenging ahead while credit charge stays volatile and elevated given the economic challenges and historically volatile collections in its Personal Financing segment. We slashed our FY20E earnings by 50% and reduce our TP to RM0.60. Downgrade to UNDERPERFORM.

Loss due to higher impairments. 1QFY20 pre-tax loss of RM73m (vs. 1QFY19: +RM83m) was below our and consensus expectations. The losses were attributed to higher-than-expected impairment allowances of RM292m (vs. 1QFY19 allowances of RM153m).

Higher impairments coming from Personal Financing. While impairment allowances spiked, top-line was also weak, falling 1%/2% YoY/QoQ to RM363m. As expected, conventional banking operations tapered off as NII fell 25%/12% YoY/QoQ with Islamic Banking improving slightly YoY at +2% YoY but fell 10% QoQ. On a positive side, NOII saw a +6%/+187% surge to RM45m due to sale of investment securities (RM30m – contributing 67% of NOII). The surge in impairment allowances saw credit charge spiking to 3.3% (1QFY19:1.73%) coming mostly from PF – alluding to civil servants not paying due to the incoming moratorium despite their ability to do so. Gross Financing was flat YoY. Corporate loans ticked up 10% YoY while Mortgages surged +12% YoY – due to undisbursed stock – offset by PF declining 3% due to the transition to higher-income customers (salary >RM5K). NFM (Net Financing Margin) slipped 30bps to 2.6% as more variable rates products are introduced coupled with higher Sukuk costs. Gross Impaired Loans (GIL) ratio is still elevated at 5.5% as the planned sale of its conventional impaired loans (estimated at RM1b) has been deferred to CY2021.

Credit charge expected to taper but will still be elevated. Management guided for a still elevated credit charge of 120-150bps (vs. previous guidance of 30-50bps) for FY20 as it buildsup its provisioning buffers. This, however, implies significantly lower credit cost ahead. Meanwhile, we expect loans growth to come from its Business Banking –unutilized stock at RM4b – management guided for loans growth coming in from PF as these will be contributed from middle to higher end GLCs staffs and civil servants (note that 96% of its PF are via salary deductions) as management opted for a cautious stance on its Business Banking. NFM is expected to slide further, guided for 2.5- 2.6%, given the additional rate cuts in May. Its NOII is expected to remain resilient in the coming quarters (coming from sale/gains of investment securities) taking opportunity from the recent rate cuts.

Earnings revised downwards. Post results we slashed our FY20E/FY21E earnings by 50%/26% to RM313m/RM407m. We expect a mild recovery for FY21 with a much lower credit charge but within its Global Financial Crisis range of 80-100bps. Our assumptions for FY20E; (i) loans growth at -2% (vs. management’s target of 3-4%), (ii) NIM at 2.6% (unchanged), and (iii) credit charge at 140bps (from) 35bps.

TP and call revised. Our TP is reduced to RM0.60 (from RM0.90). Our TP is based on a GGM-derived PBV of 0.45x ascribed to FY21E BVPS. We view its targeted PF loans growth to be at risk given the current challenging times with its volatile impairment allowances leading to elevated credit costs ahead. Downgrade to UNDERPERFORM.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) higher-than-expected loans & deposits, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 26 Jun 2020