We revised our TP downwards with a MARKET PERFORM call as earnings will be impacted on a slightly higher loan loss provisions with stable NIM. While management is still optimistic of mid-to-high single digit loans growth, asset quality will be a challenge. Nonetheless, the management is still confident in containing costs and stabilizing NIM.

6M17 core net profit (CNP) was within expectations accounting for 49% of our and consensus estimates with an improvement of 4% YoY. Overall performance was lacklustre as its top line improved by just 2% YoY dragged by falling Net Interest Income (NII) and Non- Interest Income (NOII) but mitigated by solid improvement in Islamic Banking income at 22%. Pretax was up by 3% due to lower credit costs of 18bps with operating expenses (opex) inching marginally by 1%. Deposits still outperformed loans growing at 5% vs 3%. On a positive note, asset quality improved by 18bps to 0.9%. No change in performance on a quarterly basis with CNP flat for the quarter as the top line declined 1% despite declining allowances for impairments by 2bps to 0.17% and declining opex by 1%. Loans and deposits rebounded for the quarter by 2% and 3%, respectively. An interim dividend per share of 8.5 sen was declared (within our expectation) representing a 50% payout.

6M17 vs 6M16, YoY

• Top line growth was somber at 1.9% with Islamic Banking improving at 21.9% and dragged by declining performances from (NII) at 1.1% and (NOII) at 4.9%. Drop in NOII was mostly due to forex loss of RM20.4m vs RM9.2m gain a year ago.
• NIMs fell by 6bps as fall in average lending yield was faster than fall in cost of funds (-14bps vs -5bps).
• Cost to Income Ratio (CIR) improved slightly by 44bps to 46.5% (vs. industry’s 48.8%) as total income outpaced opex growth (+0.9%).
• Loans growth was lower than the year before at +2.9% (6M16: +10.2%), deposits were slower at +4.9% (6M16: +8.1) vs. the industry loan/deposit growth of +4.2%/+0.8%. (We had expected growth of +8%/+6%). Loans were driven by the SME segment which grew +14.0% (6M16: +20.3%) whilst deposit growth was driven by the business enterprises at +13.8% (6M16: +10.9) but mitigated by falling individual depositors by 3.5% (6M16: -2.2%). Islamic financing grew 4.2%.
• LDR fell by 2ppts to 84.6% (vs. industry average of 88.6%) as loans growth was subdued vs deposits. CASA grew at 2.8% but ratio fell 70bps to 32.9%.
• Assets quality improved as Gross Impaired Loans (GIL) fell 18bps to 0.9% but still better than the industry’s GIL of 1.6. The improved ratio is aided by some RM35.6m Restructured & Rescheduled (R&R) loans reclassified as performing. Mortgage loans make up 49% of the total impaired loans. Likewise, credit charge cost was down by 2bps to 0.18% (we had expected 13bps in credit cost) due to better recoveries. Loan loss coverage (LLC) minus regulatory reserves improved by 9ppts to 101.9%. Industry’s LLC was at 89.4%
• CET1 and CAR improved by 47bps and 316bps to 12.2% and 16.8% (after deducting proposed dividends) well above the regulatory requirements of 7% and 10.5%), respectively.
• Annualised ROE fell by 50bps to 10.9% as (vs. our estimate of 10.6%) due to improved shareholders’ equity by 9.8%.

2Q17 vs. 1Q17, QoQ

• 
  Bottom line was flat at RM132.6m as top line declined by 1.1% despite falling opex (-1.0%) and loan loss provisions by 7.3%.
• 
  Fall in top line due to falling NII (-3.7%) and NOII (-8.7%) but mitigated by improvement in Islamic Banking income at 16.5%.
• 
  NIMs fell 6bps in average lending yield, faster than fall in cost of funds (-10bps vs -4bps due to the OPR cut).
• 
  CIR was flattish at 46.5%.
• 
  Loans and deposits rebounded for the quarter at 1.7% and 2.9%, respectively, pushing LDR downwards by 1ppst to 84.6%.
• 
  Asset quality improved as GIL improved by 23bps to 0.9% with credit costs lower by 2bps to 0.17%.

NIMs likely to be stable. Despite moderate loan growth for 1H17, management maintains loans to improve at mid-to-high single-digit for FY17 due to loan mix and better risk adjusted returns, especially from the SME and Commercial segments. Profitability will be driven by almost flattish NIM and credit costs contained at 25bps to 30bps. We are inclined to believe that downward pressure on NIMs will be minimal with COF unlikely to track higher as deposit taking will be slower in tandem with subdued loans growth. Management indicated it is comfortable with the current LDR of ~85% reinforcing our view that deposit taking will not be intense. Although asset quality has improved, management is cautious on the quality of its portfolio going forward. And, being cautious, we tweaked our credit costs assumptions higher for FY17. We make slight changes to our assumptions of: (i) loans growth at 8%/9% for FY17/FY18 (unchanged), (ii) deposits to grow at 6% for both FY17 and FY18 (unchanged), (iii) NIMs flattish at 2.05% for FY17 and improving by 4bps for FY18 (previously improving by 10bps for FY17 and stabilizing for FY18), and (iv) credit costs at 20bps for both FY17/FY18 (previously at 13bps for both FY17/FY18).

Earnings forecasts revised. As there a few changes in our assumptions, our FY17E/FY18E earnings are revised downwards by 5%/1% to RM520m/RM558m.

Target Price revised, but call maintained. Our revised TP is now RM3.97 (from RM4.08 previously) due to the cut in earnings on an unchanged blended FY17E PB/PE ratio of 1.1x/12.4x. With lacklustre performance ahead, 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 - 30 Nov 2016