Results

• In line with expectations. Posted 2Q17 net profit of RM132.6m (-1.5% YoY, +8.7% QoQ), bringing 1H17 net profit to RM265.1mn (+3.3% YoY). This is in line with HLIB and consensus estimates, accounting for 49% and 48.7% of full year forecast respectively.

Deviations

• None.

Dividend

• Declared higher dividend of 8.5 sen vs. 8.0 sen in 1H16, translating into RM131m or 49% payout ratio.

Highlights

• Keeping FY17 target…. Only loan growth missed target, other targets namely NIM, CTI, credit cost and ROE were maintained.
• 2Q17…. Net profit touched RM132.6 m (-1.5% YoY, +8.7% QoQ) chiefly affected by lower NOII (-16% YoY, -2.1% YoY) and NII (-4.2% YoY,-3.7% QoQ). NOII was impacted by forex losses of RM11.9m while NII was on the back of slower loan base. On QoQ and YoY, credit cost improved to 16.8% due to slower GIL whilst IA and CA stayed benign.
• 1H17…. Net profit rose to RM265.1m (+3.3% YoY) due to Islamic banking income of RM145.8mn (+21.9% YoY) which offset both NII and NOII which declined by -1.1% YoY and - 5.2 YoY due to lower loan base and forex loss respectively. Expenses continued to be contained, rising by 0.9% YoY and CTI remained stable at 46.5%. Credit cost fell marginally to 36.2% due to slower recoveries.
• Loans grew 3% YoY and 1.7% QoQ vs. management guidance of mid to high single digit growth. Nevertheless, risk adjusted return (RAR) loans surged strongly by 13.8% YoY driven by SME segment whilst other RAR loans continued to contract (-0.5% YoY).
• Deposit growth was still respectable at 4.7% YoY driven by fixed deposit (+10.7% YoY). Nevertheless, NIM was unchanged at 2.22% due to rising CASA by 2.6% YoY and better yield pricing on RAR loan. CASA rose to account for 33.2% of total deposits. LDR was relatively low at 84.6% against industry of 89.4%.
• Asset quality was impressive at 0.9% in 1H17 driven from lower impairment from mortgage segment and LLC jumped to 101.9% vs. 83.9% in 1Q17 from lower CA and IA.

Risks

• Lower demand for RAR loans as management now focuses on this segment.

Forecasts

• Maintained.

Rating

HOLD (↔)

• There were several positive signs but we foresee that NIM compression is likely to persist due to impact of rising fixed deposits. The rising competition in the SME space will impact AFG loan growth in FY17 and likely to put pressure on NIM.

Valuation

• Maintain HOLD recommendation, with unchanged target price of RM3.89 based on Gordon Growth with ROE of 11% and WACC of 10.2%.

Source: Hong Leong Investment Bank Research - 30 Nov 2016