We expect FY18 to be a challenging year on prospect of subdued loans growth as well as higher opex and credit costs. Our TP is reduced slightly to RM4.15 but rating is revised upwards (as per our new rating definition).

Earnings declined, but NIM improved. Year-on-year, FY17 core net profit (CNP) declined by 1.9%, as sharp spike in impairment losses (+137% YoY) offset the growth in top-line revenue of +3.2% YoY on the back of a rebound in top-line revenue and stronger credit recovery. At 98%/96% of house/consensus estimates full-year estimates, the 12M17 results were in line. The moderate growth was boosted by strong growth in Islamic banking income (+21.7% YoY) as fee-based income declined by 2.2% YoY and fund-based income was flat. Fund-based income was flat which we believe was due to slower loans of +1.5% (compared to a year ago) despite Net Interest Margin (NIM) improving by 11bps to 2.26%. The improved NIM was due to yield improvement from higher RAR loans and lower funding cost from more efficient funding mix. Cost-to-Income ratio (CIR) was 130bps lower to 47.1% (as top line outpaced opex at +0.4% YoY vs. industry average of 46.3).

Loans grew slower than the year before. Loans growth was slower at +1.5% (vs our expectation/industry of 4-5%/6.0% YoY). Deposits growth was dismal, declining 1.7% YoY (vs industry’s +3.2% YoY) forcing loan-to-deposit ratio to rise by 280bps to 87%. On a positive note, CASA ratio was higher by 2ppts to 34.2%, outpacing deposits growth at +4.7% YoY, which contributed further to improving NIM. Asset quality was mixed as gross impaired loans (GIL) fell by 30bps to 1.00% (vs industry’s 1.63%) with credit cost up by 9bps to 0.24%. Credit costs were higher due to the absence of large writeback on inflow of RM51.4m of Reschedule & Restructured loans.

Continued to decline for the second quarter in a row. CNP continued to decline, decelerating by 9.5% QoQ dragged by falling top-line of 3.0% QoQ and higher opex of +3.9% QoQ. Top-line was dragged by falling fee and fund based income of 8.7% QoQ and 2.6% QoQ, respectively. NII declined as NIM fell by 1bps with loans flattish. Deposits meanwhile fell slightly by 0.3% but CASA improved by +1.3%, which mitigated the declining NIM. The weak deposits saw LDR rising slightly by 40bps to 87.0%. Asset quality stable at 1.0% with credit costs falling by 5bps to 0.28%.

Challenging FY18. We, expect FY18 earnings to continue to be challenging due to: (i) higher opex as management roll out new innovative products, and (ii) higher allowances for impairments. Management guided for FY18 CIR of <51% and credit costs of between 30-35bps with conservative loans growth of mid-single digit. We, however, expect better NIM due to the focus on better yield loans.

FY18 forecasts earnings revised. Based on management’s guidance and a few changes in our assumptions for FY18, earnings are shaved by 5% to RM496m. We also introduce our FY19E earnings, lower due to impact of MFRS9.

Target Price and call revised. Our revised TP is now RM4.15 (from RM4.17 previously) with a blended FY18E PB/PE ratio of 1.23x/12.41x (previously FY17E PB/PE ratio 1.22x/12.33x). The PB ratio is lower than its FY17 PB of 1.24x to reflect lower ROEs ahead while the higher PER multiples is to reflect better loans. While potential returns are not attractive but within our definition range, we revised its rating upwards to MARKET PERFORM.

Source: Kenanga Research - 1 Jun 2017