No surprises with 6M17 core earnings of RM1,093m which was within expectations, accounting for 52% and 50% of ours and consensus estimates, respectively. An interim dividend was declared for the year at 15.0 sen/share (in line). Our TP is raised to RM13.81 as we roll over our valuations to FY18, but we maintain our MARKET PERFORM call.

Lower-than-expected opex and provisioning bolstered earnings. Core Net profit (CNP) improved by 29.0% with healthy top-line growth across the board coupled with lower-than-expected operating expenses (opex) and allowances for impairments. Top-line improved by +8.5% YoY driven by improvement in Net Interest Income (NII) at +4.6% YoY, Islamic Banking income (+15.4% YoY) and Non-Interest Income (NOII) by 15.4% YoY. The slightly better NII was attributed to better NIMs (improved by 6bps vs. our estimate of a 5bps improvement) despite slower loans YoY. Loans were slower at +4.6% YoY (vs. our expectations of +6%, management’s guidance of 5-6% and industry’s +5.3%). Deposits growth of +4.1% was below our expectations of +6% but higher than industry’s +1.5%). With both loans and deposits achieving similar traction, loan-to-deposit ratio (LDR) rose marginally by 40bbps to 81.9%. Prudent management led to falling opex by 11.6% contributing the improvement in Cost to Income ratio (CIR) by 10ppts higher to 43.6% (vs industry’s 48.9%). Asset quality continued to be stable at a flattish 0.86% with credit costs falling by 6bps to 0.09% (vs. our expectations of 0.20%). With the increase in earnings, ROE was at 10.3% improving by 70bps and within management’s target of 10-11%%.

Earnings to be driven by better NIMs going forward. Going forward, management revised its FY17 guidance; (i) loans growth of 4-5% (from 5-6% previously), (ii) NIMs improving 5-10bps (maintained), (iii) CIR below 46% (maintained), (iv) credit charge of 25-35bps (maintained), and (v) ROE of 10-11% (vs. our estimates of 9.5%-10.5%). Loans growth will still be a challenge in this uncertain environment coupled with management’s focus of maintaining quality and margins over loans growth. We feel that COF will be manageable and upward pressure unlikely with LDR at ~82% thus NIMs are likely to widen as per guidance. As asset quality from the major segments; housing, transport and working capital showed stability YoY and QoQ, we expect stable asset quality going forward. Although management guided a gross credit charge of 25-30bps, we believe improved recoveries aided by a more stable economy will push credit costs lower. We are also cautious on Bank Chengdu’s performance, which is likely to improve going forward from better cost discipline and prudent management.

Revision in earnings Forecast with TP raised but call maintained. All in all, our FY17E/FY18E earnings are revised upwards slightly by 1.9%/2.1% to RM2,146m/RM2,287m. We raised our GGM-TP to RM13.81 (from RM13.56) as we roll over valuation base to FY18 based on a 1.17 P/B (previously 1.15x FY17 P/B) where we utilised; (i) COE of 8.7% (unchanged), (ii) FY18 ROE of 9.8% (previously FY17 ROE of 9.7%), and (iii) terminal growth rate of 2.5%. The higher P/B is to reflect the higher ROE going forward. Our MARKET PERFORM is maintained as the challenging business environment still prevails in both domestic and China operations.

Source: Kenanga Research - 22 Feb 2017