9M17 CNP of RM3,414.9m is above/in line with our/consensus expectations accounting for 84%/77% of fullyear estimates. No dividend declared as expected. Slight changes to FY17E/FY18E earnings. TP reduced to RM6.75 but maintain OUTPERFORM rating.

Above expectations. 9M17 CNP of RM3,414.9m is above our/in line with our/consensus expectations accounting for 84%/77% of full-year estimates. The better-than-expected performance was driven by Islamic Banking Income which grew by 19% YoY (vs. our expectations of slight dip of 2%). The rest was within our expectations with (i) loans at ~7%, (ii) CIR <52%, and (iii) credit costs of ~65bps.

Results’ highlights. 9M17 CNP of RM3,414.9m grew +33% underpinned by: (i) top-line growth of +9%, (ii) falling impairment allowances by 2%, and lower tax rate by 2ppt to 23%. Top-line was supported by broad based growth of fund-based income (+10%), Islamic banking income (+19%) and fee-based income (+16%). Earnings was also supported by higher loans coupled with better NIM of 9bps (vs. our expectation of 1bps compression and guidance of 5- 10bps compression) and lower credit costs by 6bps to 0.68%. QoQ, 3QFY17 CNP growth of 3% was driven by: (i) top-line of 2%, and (ii) lower impairment allowances by 1%. Top-line was moderate due to fund-based income falling by 3% but mitigated by fee-based income of 15%. Fall in top-line was exacerbated by soft loans (1%) and fall in NIM by 14bps to 2.6% partly due falling average lending yields with increase in mortgage lending. As impairment allowances fell, credit cost also fell by 5bps to 0.74%.

Overall on track as guided for FY17. We are encouraged by the strong loans growth (exceeding target with domestic loans growing stronger than industry) and optimistic on the group achieving its target on the back of sustainable capital market activities, better than expected Islamic banking income and resolute loans with the absence of high provisions seen in FY16. Management revised its guidance for flattish NIM going forward attributed to soft deposit-taking as credit demand is not robust. The soft deposit-taking saw benign competition for deposits; thus, there is no added pressure on cost of funds. Strong CASA growth from transactional banking is an added advantage in mitigating funding costs pressure. A further plus point in stable NIMs with the Group’s NSFR at ~100% with added advantage of Thailand and Indonesia’s NSFRs above 100%.

Forecast earnings revised. Post results, changes are made to our FY17E/FY18E where we revised slightly by +6%/+2% to RM4,326m/RM4,583m as we input in better performance from Islamic Banking by +18%/18% YoY (from -2% for FY17) for FY17E/FY18E.

Maintain OUTPERFORM with a lower TP. While issues on asset quality are receding, other challenging headwinds such as moderate loans growth and pressure on credit costs still prevail. Our GGM-TP of RM6.75v valuations are based on its 5-year average P/BV of 1.23 (previously 1.27x) where we utilised: (i) COE of 7.4% (7.6% previously), (ii) FY18 ROE of 8.4% (from 8.9%), and (iii) terminal growth of 2.5% (unchanged). At 1.23x P/BV, this implies a 0.2SD below mean on concerns of MFRS9 going forward. TP is now lowered to RM6.75 but with potential total returns still looking attractive at ~17%, we maintain our OUTPERFORM call.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-thanexpected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 29 Nov 2017