1H17 core earnings of RM675 is broadly within expectations at 47%/54% of our/consensus estimates mainly due to improved write-backs and flattish top line growth. We retain our view of subdued loans growth with NIM still likely to be under pressure ahead. We maintained our TP of RM4.63 but raised our call to OUTPERFORM as the stock is looking attractive due to the recent sharp pullback in its share price.

1H17 core net profit (CNP) fell 6%, brought about by flattish top line growth as loans improved marginally by 0.5% with NIM further compressed by almost 16bps. The fall in CNP was mitigated by improved credit recovery by 5bps to 0.17% as asset quality improved by 31bps. On a QoQ basis, despite flattish loans growth, CNP improved by 9% with credit recovery flattish at 17bps and boosted by a lower tax rate of 20%. An interim dividend of 5.0 sen/share was declared (within our expectations of 14.0 sen/share).

1H17 vs 1H16, YoY

• Top line growth was flat (-0.3% vs 1H16: -26.8%), dragged by fall in: (i) Net Interest Income (NII) at 10.5% (1H16: -16.1%), and (ii) Islamic Banking income at 2.1% (1H16: -5.3%) but mitigated by rebound in Net Interest Income (NOII) by 14.8% (1H16: -44.4%). NOII improved via an 8% jump from net insurance income and a 63% spike in fee & trading income. NOII contributed 39.1% of top line earnings vs. 39.6% of NII contribution (1H16: 31.7% vs. 45.8%)
• NIM compressed by 16bps (vs. our estimate of 4bps compression) reflecting the timing difference between the downward adjustment in base rate lending (due to the July OPR cut) and repricing of fixed deposit rates.
• Cost to Income Ratio (CIR) remained intense, rising by 4ppts to 56.1% (vs. industry average of 48.8%) as opex growth (+7.4%) outpaced flattish income. The higher opex was attributed to higher wage costs at 7.7%.
• Loans growth was abysmal at 0.5% whilst deposits declined by 6.8% (vs. the industry’s +4.2%/0.8% and our expectations of 1.0%/2.6%). LDR rose 7ppts to 104.8% (above the industry average of 88.6%) as deposits outpaced loans. Loans were driven by residential property financing (+20.4%) but offset by falling corporate loans of 4.1% and hire purchase at 7.1%. Falling corporate loans due major repayments and subdued business outlook. Loans to SME improved by 3.2%. The fall in deposits was led by falling demand for term deposits by 7.8% with CASA falling by 3% making CASA composition to total deposits up by 80bps to 21.9%. The lower deposits were due to the focus on better yield investments and reducing reliance on expensive deposits.
• Asset quality improved as Gross Impaired Loans (GIL) fell 31bps to 1.64% (vs. industry 1.65%). The improvement can be seen in lower deterioration from the real estate and household sectors by 5bps and 11bps, respectively.
• Loan loss coverage was down by 11ppts to 83.5% (vs. the industry’s coverage of 89.4%) reflecting its exposure to several non-residential property accounts, which most are well collateralised. Due to better recoveries, there was a credit recovery 17 bps (vs. our expectations of credit recovery of 13bps)

Source: Kenanga Research - 22 Nov 2016