3M17 core earnings of RM132m were within expectations accounting for 24% of both our and consensus estimates. No dividend was declared as expected. With no revision in our estimates, our MARKET PERFORM call is maintained but valuation is revised slightly higher to stronger higher loans growth going forward.

3M17 core net profit (CNP) was within expectations and improved by 10.2% YoY attributed to a +5.7% YoY growth in top line but offset by higher allowances for impairments at +17.7% (RM19.3m). Loans growth was slumbering at +2.9% but NIM compression was marginal by 1bps YoY. On a quarterly basis, top line improvement of 3.1% was beset by higher allowances for impairments with NIM performing better, but loans growth saw a decline.

3M17 vs 3M15, YoY

• Topline growth of +5.7% was boosted by positive increment across the board with Net Interest Income (NII), Islamic Banking Income and Non-Interest Income (NOII) at +2.1%, +15.0% and +8.1%, respectively (3M16: +4.0%, +9.1% and -6.3%, respectively).
• NIM was almost stable at 2.02% attributed to lower lending yields with cost of funds (COF) stabilizing (we had assumed an improved NIM by 10bps).
• Cost to Income Ratio (CIR) improved by 2ppts to 46.5% as total income outpaced opex growth (+1.0%). Higher opex due to higher personnel cost was offset by lower marketing expenses. The recorded CIR was healthier than the industry’s average CIR of 49.7%.
• Loans growth was lower than the year before at +2.9% (3M16: +12.5%), deposits were slower at +2.3% (3M16: +10.8) vs. the industry loan/deposit growth of 5.6%/-0.8%. (We had expected growth of +8.3%/+6.3%). LDR was almost flattish at 85.6% (vs. industry average of 87.5%) as loans outpaced growth. Loans were driven by the SME segment which grew +16.1% (3M16: +21.4%) whilst deposit growth was driven by the business enterprises at +14.1% (3M16: +6.4) but mitigated by falling individual depositors by 3.6% (3M16: +1.6%). CASA ratio fell 2ppt to 32.9%.
• Assets deteriorated as Gross Impaired Loans (GIL) advanced by 17bps to 1.2% but better than the industry’s GIL of 1.7%. Likewise, credit charge cost was up by 2bps to 0.20% (we had expected 13bps in credit cost). Loan loss coverage (LLC) minus regulatory reserves declined by 22ppts to 83.9% (including Regulatory reserves of LLC improved by 14ppts). Industry’s LLC was at 89.5%
• CET1 and CAR improved by 65bps and 333bps to 11.8% and 16.3% well above the regulatory requirements of 7% and 10.5%), respectively.
• Annualised ROE was at 11.1% (we had expected it to be at 10.6%).

1Q17 vs. 4Q16, QoQ

• CNP improved slightly by 2% (4Q16: -4.2%) attributed to topline growth of +3.1% but mitigated by higher allowances for impairments of RM19.3m (vs RM0.2m in 4Q16). NII, Islamic banking income improved by +0.5%, +9.8% and +5.1%, respectively. (4Q16: -2.2%, -3.0% and -2.3%, respectively).
• NIM improved by 2bps to 2.02% due to falling COF attributed to redemption of Tier 2 Subordinated Notes.
• CIR improved by 5ppts to 45.5% (vs a deterioration of 3ppts in 4Q16).
• Loans fell by 0.8% (4Q16: +0.3%) with deposit growth falling faster at 2.4% (4Q16: +5.7%). Hence, LDR rose marginally by 135bps to 85.6%. CASA improved slightly by 77bps to 32.9%.
• Asset quality was mixed as GIL improved by 7bps to 1.2% but credit cost was higher at 20bps.

No change in outlook. Despite moderate loan growth for quarter, management expects loans to improve at high single-digit in the next 12 months due to improving loan mix and better risk adjusted returns, especially from the SME and Commercial segments. Profitability will be driven by almost flattish NIM and better asset quality, which will have credit costs contained at 25bps to 30bps. As for CIR, management expects it to be under 50%. We make no changes to our assumptions of: (i) loans growth at 8.5% for FY17 and 9% for FY18, (ii) deposits to grow at 6.5% for FY17 and 6% for FY18, (iii) Improved NIMs by 10bps for FY17 and stabilizing for FY18, and (iv) credit costs at 13bps for both FY17/FY18 and CIR at 49% for both financial years.

No change to earnings forecasts. As results were within expectations, there is no revision to our assumptions; thus, our FY17E/FY18E earnings are maintained at RM545m/RM565m.

Target Price revised, but call maintained. Our revised TP is now RM4.08 (from RM4.04 previously) on a blended FY17E PB/PE ratio of 1.11x/12.4x (Previously we use a blended 1.27x/10.66x PB/PE ratio with the PB ratio 1-SD below its historical 5-year average while the PE ratio is 0.5-SD below its 5-year historical average). Our revision is justified with a higher PE to reflect higher loans growth going forward (from actual +4.9% in FY16 to +8.5% for FY17). However, lower employed PBV is to reflect lower ROE going forward (from actual +11% in FY16 to 10.6% for FY17E). With limited upside to our TP, we maintain MARKET PERFORM.

Downside risks to our call are: (i) lower-than-expected margin squeeze, and (ii) lower-than-expected loans and deposits growth, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 23 Aug 2016