The Group reported a relatively resilient 1QFY21 net profit of RM365.2m (-6.5% YoY, +47.5% QoQ) despite taking an RM57.5m hit from modification losses as a result of the 6-month loan moratorium. While coming in slightly ahead of our and consensus forecasts at 29% and 32% of full-year estimates respectively, we deem this in line given expectation of higher loan loss provisions going forward. The Group took another RM10m in pre-emptive macro provisions during the quarter in preparation for still-uncertain operating conditions, but which will be weaker no less come September/October. Underlying income growth (+8.0% YoY, excluding modification losses) is encouraging in spite of margin compressions. Higher credit costs will take a bite off near- to mid-term earnings growth however. We trim FY21 earnings by 8% to account for slightly deeper margin compressions. Our RM3.20 target price is left unchanged while Neutral call is also retained given limited price upside in the absence of near-term re-rating catalysts.

• Income for 1QFY21 increased +2.6% YoY to RM1.09bn, but which would otherwise have been higher by +8.0% YoY if not for RM57.5m in net modification losses incurred. Non-interest income (NoII) growth (+21.3% YoY) was a major contributor, underpinned by Treasury-related income which jumped 3-fold to RM123m.

• Expenses for 1QFY21 were well-contained, only inching higher by 1.9% YoY to RM538.6m as the Group continued to reap the benefits of its efficiency initiatives. Positive JAWS was achieved yet again (6%, on an underlying basis), with cost-to-income at 49.3%.

• Net interest margin (NIM) saw significant compressions during the quarter, down a cumulative 36bps QoQ to 1.59% (21bps owing to policy rate cut, 15bps for modification losses). Further compressions are likely, given expectations of another rate cut (or two) while an expected increase in restructured and rescheduled (R&R) loans come October (post-blanket moratorium) will see further modification losses incurred. Management is unable to provide guidance at this juncture given the lack of clarity.

• Weak loans growth (+0.2% QoQ) is not a surprise given prevailing economic conditions, with business-related loans seeing notably weaker momentum. Hire purchase financing continues to shrink (-11.5% YoY, -2.2% QoQ).

• Asset quality remains a key area of risk, with impairments only likely to become more apparent upon expiry of the 6-month loan moratorium end September. Asset quality remains sound for now with ~86% of its total book in Stage 1 and >50% in the “Strong/Exceptionally Strong” risk grade. Management has nevertheless added a further RM10m in pre-emptive macro provisions, with its buffer now at RM177.3m. Current overall gross impaired loans ratio is 1.66% (4QFY20: 1.73%), with loan loss coverage at 97.0% (4QFY20: 92.4%)

Source: PublicInvest Research - 27 Aug 2020