No surprises with 9M17 core earnings of RM3,984m coming within expectations and accounting for 75%/76% of our and consensus estimates. No dividend declared as expected. Although results were in line with our consensus estimates, we tweaked our TP slightly upwards to RM21.45 (due to upwards revision of NIM) but maintained our MARKET PERFORM call.

Healthy earnings supported by broad-based growth and lower impairment allowances. Core net profit jumped by +7% YoY underpinned by strong top-line revenue at +7.6% supported by lower impairment allowances (-21.9%) to Rm179.5m. Net Interest Income (NII), Islamic banking income and Non-interest income (NOII) reported healthy growth at +8.0%, +5.1% and +7.6%, respectively. Higher fund based income was attributed to loans growth of +4.5% (vs system loans growth of ~+5.8%) and higher NIM (improved by 1bps vs our estimates of 5bps compression) which we believed was attributed to strong CASA performance and efficient management of funding growth.

Loans and deposits eased. Loans continued to ease at +4.5% YoY (vs 3Q16: +7.5% YoY) vs our estimates of +4.5% YoY (and within management’s guidance or 4-5% YoY. However, deposits growth of +1.5% YoY was below management’s target of 5-6% (and our estimates of 5-6% and industry’s growth of ~5%). As loans outpaced deposits, loan-to-deposit (LDR) ratio surged by another 3ppts to 93.4%. We believe the lower deposit was management’s prudent strategy to defend NIM and also due to moderate credit demand. On a positive note, CASA growth outpaced deposits at +8.9% YoY prompting higher CASA ratio by 2ppts to 25.5%. As usual, due to prudent approach in cost management, Cost-to-Income (CIR) ratio was stable at ~ 32.8% (up slightly by 30bps) vs industry’s CIR of 48.0%.

Asset quality benign. Asset quality continued to be stable with gross impaired loans (GIL) stable at 0.5% (vs. industry’s 2.0%) but credit costs saw an uptick of 1bps to 0.12% (vs. a 0.15% guidance). Despite an increase in earnings, ROE at 14.89% was 30bps lower than a year ago (but within management’s target of 14-15%) attributed to higher equity (+9.4% YoY). Capital position remained strong with CET1 and Capital Ratio improving by 70bps and 20bps to 11.7% and 15.4%, respectively.

Moderate outlook maintained. We do not expect uptick in loans in 4Q as management will be prudent in its corporate lending. Loan focus will still be on SME financing and affordable housing going forward and despite the prevailing headwinds, management has consistently maintained loan quality from these segments. HP financing is tight with falling loans due to lower loan size as the focus will be on first-time buyers purchasing the middle and lower range segment. Going forward into 2018, we expect a still prudent approach by management and do not expect robust growth and maintained our 2018 assumptions.

Forecast. We tweaked slightly our earnings forecasts for FY17/FY18 by 2.5%/2.8% to RM5,434m/5,434m on account of better NIM (downward revision of funding costs). We do not expect pressure on funding costs due to its NSFR at >100% and moderate credit demand. 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 upwards to RM21.45 (from RM21.15 based on unchanged 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 potential upside on returns are ~8% to our TP.

Source: Kenanga Research - 27 Oct 2017