1H17 core earnings improved 30% YoY in line due to lower impairment allowances. A DPS of 23.0 sen was declared (within expectations). TP of RM9.50 and MARKET PERFORM call maintained.

Boosted by lower impairments. Core net profit of RM3,361.2m (+29.9% YoY) is in line with our/consensus estimates accounting for 51%/47% of full-year estimates. The improvement in earnings was attributed to sharp fall in impairment allowances (-33.1% YoY) as topline eased to +5.8% YoY. Top-line was moderate as fee-based income fell 6.6% YoY offset by fund-based income of 7.7% YoY and stronger performance from Islamic banking income at +19.6% YoY. Fund-based income was driven by higher loans (+6.4% YoY) and improved NIM by 9bps (vs our expectations of a 2-6bps compression) due to better growth of CASA. Opex jumped +6.7% YoY driven by higher personnel costs (+7.7% YoY) and administrative & general expenses (+13.7% YoY) but cost-to-income ratio was marginally higher by 50bps to 49.3% (vs industry’s 49.1%) as management maintained a tight grip on expenses. At the PBT level, Malaysia is still the biggest contributor (at 68.7% but lower than 1H16 80.3%) but overseas contribution improved with Singapore at 9.7% (1H16: 6.1%), Indonesia at 10.0% (1H16: 9.2%) and others at 11.6% (1H16: 4.4%).

Loans grew at +6.4% YoY (vs our expectation/management’s guidance of +6.3%/6-7% YoY), driven by mortgages (+8.3% YoY, SME (+7.1% YoY and HP financing (+10.9% YoY). On a geographical basis, loans were driven by domestic demand at +6.4% YoY (vs domestic industry’s +5.7% YoY), with expansion in Singapore at +4.9% YoY but slower in Indonesia at +3.2% compared to a year ago. Deposits (including Investment Account) were flattish at +0.3% YoY but CASA surged by 7ppts to 10.0% YoY prompting higher CASA ratio by 3ppts to 35.1%. Domestic group’s deposits were flat (-0.3% YoY), but International deposits eased to +3.8% YoY with Singapore down by 6.7% YoY and Indonesia easing by 2ppts to +7.0% YoY. As loans outpaced deposits, there was an uptick in loan-to-deposit ratio (+530bps) to 93.8%. Asset quality was mixed compared to a year ago with Gross Impaired Loans (GIL) rising to 19bps to 2.5% (due to rise in Non-performing loans), but credit charge fell 23bps to 0.40% (vs our expectations of 0.53%).

Management is treading cautiously ahead, with 2H performance expected to be supported by better economic outlook and sentiment with government support on infra projects (Indonesia). We maintain our cautious optimism with pick-up in loans likely in 4Q on the back of improved business demand and asset quality likely improving on the back of improving economic fundamentals ahead. While NIM improved tremendously, we caution on the uptick as compression will likely occur ahead along with the likely pick-up in deposit taking activities when credit demand picks up.

Forecasts earnings revised for FY17E/FY18E. We revised our FY17E/FY18E earnings by -2%/1% on the back of softer fee-based income (lower income from insurance business) with slightly higher FY18E earnings on the back of improved economic fundamentals across the home markets.TP and call maintained. TP maintained at RM9.50 based on a FY18E 1.27x PB implying 0.7SD below its 5-year average to reflect our concerns on the incoming MFRS9 in FY18. Assumptions adopted in our GGM-TP are; (i) COE of 7.5%, (ii) FY18E ROE of 9% (8.8% previously), and (iii) terminal growth rate of 2.5% (unchanged). With a strong dividend yield of >5% (the highest in the industry) giving a potential total return of >5% we reiterate our MARKET PERFORM call.

Source: Kenanga Research - 5 Sept 2017