No surprises with 3M17 core earnings of RM1,248m within expectations, accounting for 28% of both our and consensus estimates. No dividend declared as expected. As results were in line with our conservative estimates, we maintained our TP RM21.17 and MARKET PERFORM call.

Slower earnings dragged by falling fee based income and higher opex. Core net profit (CNP) improved slowly by 1.5% YoY as topline improved by 3.3% YoY underpinned by better fund-based income (+8.3% YoY), Islamic Banking income (+8.9% YoY) and improved NIMs. Non-Interest Income (NOII) fell by 13.1% YoY dragged by lower gains from financial instruments (-90% YoY or RM4.0m) arising from lower gains from disposal of financial assets and financial investments. Better NII was attributed to better NIMs (improved by 7bps vs. our estimates of a 5bps compression).

Loans were slower at +7.0% YoY (vs. our forecast of +6.6%, management’s guidance of 6-7% and industry’s +~5.5%). Deposits growth of 3.1% was below management’s target of 5-6% (vs. our forecast of +6% and industry’s +~2%). Weaker deposits growth led loan-to-deposit ratio (LDR) rising by 4ppts to 93.8%. CASA improved by 2ppts to 25.5%. Cost to Income ratio (CIR) was 3ppts higher at 34.3% (vs. industry’s 45.8%) attributed to higher personnel costs.

Asset quality continued to be stable at a flattish 0.5% with credit costs falling by 1bps to 0.09% (vs. a 15bps guidance).

Despite an increase in earnings, ROE at 14.6% was 80bps lower than a year ago (but within management’s target of 14-15%) attributed to higher equity (+10% YoY). Capital position remained strong with CET1 and Capital Ratio improving by 70bps to 11.4% and 15.2% respectively.

Conservative ahead with NIMs compression likely. We maintain our conservative outlook for 2017 with the stable economy and positive monetary environment supporting the banking sector albeit at a moderate pace. As guided by management, loan focus will still be on HPs, SMEs financing, and residential & commercial properties going forward and despite the prevailing headwinds, management has consistently maintained the quality from these segments. The widening NIMs was a surprise (due to better management of funding costs with shorter tenure deposits coupled with >90 of its deposits maturing in Dec 2016, enabling the bank to have lower cost of deposits), but we do not discount pricier cost of funds as the bank shore up its deposits. As for asset quality, management is maintaining its current GIL ratio and expects credit costs to reach 15bps for 2017.

Forecast & Risks. No change in our earnings forecast for FY17 (RM5,316m) as results are in line with our estimates.

No change in TP and MARKET PERFORM call. We maintain our TP of RM21.17 based on a blended 2.3x FY18E P/B and 14.3x FY17 P/E. This is based on its 5-year average given its consistent performance, excellent operating efficiency and stable asset quality. We, however, maintain our Market Perform call as its upside potential is < 7% to our TP.

Source: Kenanga Research - 21 Apr 2017