6M17 core earnings of RM192m were above expectations accounting for 68%/64% of both house/consensus full-year forecasts driven by lower-than-expected impairment allowances. No dividend declared as expected. We revised upwards our TP to RM1.45 on better economic conditions ahead and maintain our OUTPERFROM call due to undemanding valuations.

Exceeded expectations on lower impairments allowances. 6M17 core net profit (CNP) improved tremendously by +97% YoY on the back of better top-line at +9% and lower impairment allowances of RM333.2m (-16% YoY). We had expected impairment allowances of RM350m for 6M17. Top-line improved due to surging Net Interest Income (NII) by 43% to RM125.8m and higher Islamic banking income of +7% YoY. NIM was healthier, widening by 20bps to 3.4% (within expectations) while cost-to-income ratio (CIR) fell 190bps to 21% (vs. our expectations of 25%). Loans and deposits growth were at similar pace at +4% YoY (vs our expectations of a +5% YoY and +7% YoY, respectively. Reported Financing/Loans to Funding Ratio was up by 78bps to 97%. QoQ performance took a dent as CNP fell by 10% due to rising opex of 17% due to rise in personnel expenses as top-line was almost flattish. Management’s focus to grow its Corporate loans/financing continued to be on track, accounting for 21% of total loans/financing while Personal Financing fell by 3ppts YoY to 63%. The rise in corporate loans/financing is in line with management’s strategic focus to grow the segment (target 30% of total financing) to dilute the reliance on personal financing. Asset quality deteriorated slightly by 50bps as Gross Impaired Loans Ratio (GIL) rose to 8.4% (mostly from retail financing) while Credit Costs fell 40bps to 1.9% (within expectations). Annualised ROE jumped 270bps to 6% (vs our expectations of >4%) as earnings improved on lower impairments.

No change in outlook as MBSB continues with its impairment programme. However, we do expect a lower credit charge-off ratio at 1.8% now (in contrast to the previous guidance of 2.0%) for FY17. Management also revised its loans guidance to ~5% YoY (vs. 5-6% earlier) as the external challenges still linger with focus on better quality assets. Loans in the 2H17 will be driven by corporate financing with an expected loan disbursement of ~RM1.9b supported by mortgages and equipment financing (which saw approval of nearly RM952m in 1H17). Going forward, with the likelihood of acquiring Asian Finance Bank, management sees minimal impact and expects growth to remain conservative in 2-3 years due to streamlining of the new merged entity. However, we are encouraged by a potential better set of FY18 earnings as its 2-year impairment programme will be over by then, and from our understanding, management expects a lower credit cost of 50-60bps for 2018.

Earnings tweaked for FY17 and FY18. Our FY17E earnings are revised upwards by 22% to RM345m on lower credit costs with FY18E earnings tweaked slightly by 1% to RM615m on the prospects of better operating income due to better economic conditions.

Our TP raised to RM1.45 (from RM1.40) based on a blended FY18E PB/PE of 1.0x/16x (unchanged). The PE is based on its 5-year mean (with a 0.2SD below mean) with the lower PB (1SD below its 5-year mean) to reflect our concerns on downside risk on earnings due to: (i) constrictive loans growth as it will compete with bigger established banks in chasing quality corporate loans, and (ii) a new cycle in deterioration of asset quality due to the higher ratio of corporate loans. With a potential return of >15% we reiterate our OUTPERFORM call.

Source: Kenanga Research - 22 Aug 2017