No change of our FY18 view of a challenging year on the prospect of a moderate loans growth. Our TP is maintained at RM4.15 but call raised to OUTPERFORM due to undemanding valuations.

Earnings rebounded, supported by broad growth. Core net profit (CNP) improved by +1.9% albeit easing YoY as spike in impairment allowances (+66.5% YoY) offset topline growth of +6.3% YoY. At 27%/26% of house/consensus estimates full-year estimates, the 3M18 results were in line with no dividend declared as expected. The improved topline is broadly supported with Islamic banking Income leading the charge at +15.8% YoY, followed by fee-based income at +8.1% YoY and fund-based income at (+2.5). The weak fund-based income (+40bps improvement YoY) was due to softer loans at +1.3% YoY (-170bps YoY) despite surge in annualised NIMs by 11bps to 2.3%. Higher risk-adjusted-return (RAR) loans with better yields supported the widening NIMs. Better operational efficiency was achieved with Cost-to-Income ratio (CIR) fell 90 bps to 45.6% as topline outpaced the rise in opex (+4.4%). Loans growth for the quarter eased by 170bps to +1.3% YoY (vs. our expectation/industry of 4-5%/5.7% YoY driven largely by SME (+9.7% YoY) and Working Capital (+12.0% YoY). On a positive note, the risk adjusted loans (RAR) loans rose +11.3% YoY (contributing 32% of total portfolio) with lower RAR loans falling by 3%. The better RAR mix contributed to the enhanced NIMs. Deposits fell 1.6% YoY (vs. industry’s +3.0% YoY) forcing loan-to-deposit ratio to rise by 250bps to 88%. On a positive note, CASA ratio was higher by 240bps to 35.3%, outpacing deposits growth at +5.8% YoY, which contributed further to improving NIM. Year-on-year, gross impaired loans (GIL) fell by 10bps to 1.00% (vs industry’s 1.64%) but credit cost went up by 12bps to 0.31%. mainly due from personal financing.

Challenging FY18. We expect FY18 to continue to be challenging due to: (i) higher opex as management rolls 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 at mid-single digit. We, however, expect better NIM due to the focus on better yield loans. Management maintains its guidance of a mid-single digit loans growth with the poor loans in Q1 volume failing to compensate for the run-off in HP and mortgage loans. We understand that management will not focus on mortgage loans in anticipation of NSFR9. Loans stream is expected by Q3 with a good pipeline coming from corporate supported by growth in unsecured loans and SME. Management is also encouraged by the strong acceptance of its Alliance One Product (product bundled with better rates) which grew ~RM300m by Jul 17. Management is also expected to introduce cost-saving measures (i.e. MSS/VSS likely in 2H18) which will see some ~RM5m in savings for FY18.

FY18 forecasts earnings revised. Based on management’s guidance on some cost-savings measures in FY18, earnings are marginally hiked by 0.8% to RM500m.

Target Price maintained, but call revised. We maintained our TP at RM4.15 due to marginal hike in FY18 earnings. The TP is based on a blended PB/PE ratio of 1.23x/12.41x. While potential total returns looking attractive, we revise its rating upwards to OUTPERFORM.

Source: Kenanga Research - 30 Aug 2017