No surprises with 6M17 core earnings of RM2,580m within expectations, accounting for 49% of both our and consensus estimates. A DPS of 27.0 sen was declared as expected. Although results were in line with our conservative estimates, we tweaked our TP downwards slightly to RM21.15 (due to slight revision downwards of loans growth) with a MARKET PERFORM call.

Healthy earnings underpinned by healthy NIMs and lower impairment allowance. Core net profit was slower than a year ago at +3.8% YoY underpinned by better fund-based income (+8.3% YoY), Islamic Banking income (+7.5% YoY) and improved NIMs. Non-Interest Income (NOII) fell marginally by 0.7% YoY mitigated by better performance from net fee & commission income (+10.3% YoY) but dragged by lower gains from financial instruments (-56.0% YoY or RM26.0m) arising from lower gains from disposal of financial assets and lower dividend income. Better fund-based income was attributed to better loans (+5.3% YoY) and better NIMs (improved by 4bps vs. our estimates of 5bps compression) which we believed was attributed to strong CASA performance and efficient management of funding growth.

Loans were tepid, decelerating further to +5.3% YoY (vs. our forecast of +6-7%, management’s guidance of 6-7% and industry’s +~5.5%). Deposits growth of +1.8% YoY was below management’s target of 5- 6% (vs. our forecast of +6% and industry’s +~3%). Weaker deposits growth led to loan-to-deposit ratio (LDR) rising by 3ppts to 94.1%. Despite weaker deposits, CASA grew by +10.3% with CASA ratio improving by 2ppts to 25.6%. Cost to Income ratio (CIR) was 150bps higher at 33.83% (vs. industry’s 49.1%) attributed to higher operating expense across the board. Asset quality was stable with gross impaired loans (GIL) stable at 0.5% (vs. industry’s 1.97%) and credit costs falling by 6bps to 0.04% (vs. a 15bps guidance). Despite an increase in earnings, ROE at 14.8% was 60bps lower than a year ago (but within management’s target of 14-15%) attributed to higher equity (+9.5% YoY). Capital position remained strong with CET1 and Capital Ratio improving by 70bps and 110bpds to 12.2% and 16.9% respectively.

Moderate outlook maintained. We maintain our moderate 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 HP, SME financing, and affordable housing going forward and despite the prevailing headwinds, management has consistently maintained the loan quality from these segments. However, management guided for a slower loans target for FY17 of 4-5% on account of current prevailing challenges. The widening NIMs was a surprise (due to better management of funding costs, but we do not discount pricier funds as the bank shore up deposits as credit demand expand going forward and in preparation for NSFR9. As for asset quality, management is maintaining its current GIL ratio and expects credit costs to be <15bps for 2017.

Forecast. We tweaked slightly our earnings forecast for FY17 by - 0.3% to RM5,299m on account of moderate loans performance as per management’s guidance for FY17. For FY18, we revised earnings downwards slightly by 0.8% on account of slight revision downwards of loan growth by 40bps. The rest of our conservative estimates are maintained.

TP revised with MARKET PERFORM call maintained. As FY18E numbers are tweaked slightly, our TP is revised slightly downwards to RM21.15 (from RM21.17 based on a blended 2.3x FY18E P/B and 14.4x FY18 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 - 26 Jul 2017