Expected weakness in loans growth, challenging asset quality and further margin compressions will weigh on near-tern earnings growth of the Group. In its quarterly meet-up with the buy- and sell-side fund managers and analysts, management highlighted potential strains which will cloud outlook in the interim, though also appearing relatively sanguine on its overall prospects otherwise. Of some interest is its exposure to an oil-trading name in the news recently, which will likely necessitate a full-provision for the exposure. We are cutting FY20/21/22 estimates by 10.9%/13.9%/16.1% respectively to take an even more conservative stance on asset quality, while also factoring further cuts in the Overnight Policy Rate and lower loans growth assumption. We still see positives in its long-term prospects, though near-tem weaknesses will pose challenges. Our call is downgraded to Neutral owing to the lack of catalysts, with dividend-discount target price also lowered to RM3.70 (RM4.80 previously) in line with the earnings cut.
Asset quality is a prime concern, particularly with economic weaknesses (ie. recessions) anticipated globally as a result of the Covid-19 pandemic. What has exacerbated conditions is the sharp drop in crude oil prices which has resulted in the corresponding collapse of certain companies. While the Group’s exposure to the oil and gas sector as a whole is a manageable 2+% of its total loans outstanding, specific cases related to oil trading could see the Group making RM500m in additional provisions at best, or just under RM1bn at worst. Loan loss coverage on the sector is at about 80%.
Direct exposure to vulnerable sectors (hospitality, aviation, retail and gaming) is at about 5.4% of total loans outstanding, and being monitored closely. Management has also indicated a further 12 sectors which are related, all of which make up a cumulative 21% of its total loans outstanding.
Loans growth is still expected to be expansionary, though likely to be in the low-single digit range. As expected, expansion has slowed sharply particularly in Malaysia with the Movement Control Order now into its 7th week. Pick-ups are anticipated 3Q/4Q on the back of its pipelines in the Malaysian mortgage and hire purchase segments. While holding steady currently, Indonesia on the other hand, is expected to weaken in the months ahead and contract for the year.
Margins are expected to slip at the upper range of its full-year 10bps compression guidance predominantly due to the cumulative 1% cut (0.5% already, 0.5% anticipated) in Malaysian OPR this year, though partly mitigated by significantly lesser deposit competition.
Source: PublicInvest Research - 29 Apr 2020
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