9MFY17 is above expectations/inline, accounting for 83%/76% of our and consensus full-year forecasts stemming from lower-thanexpected impairment allowances from other assets. Our TP is revised to RM9.35 to account for weaker loans ahead. MARKET PERFROM maintained.

Above Expectations. 9MFY17 CNP of RM5.38b is above our/inline with our and consensus estimates accounting for 83%/76% of full-year estimates. The positive deviation stemmed from lower-than-expected impairment allowances on assets and expanded NIM by 4bps (vs guided/expectations of 5-10bps compression/6bps compression. However, loans (+5.3%) were below expectation/guidance of 6- 7%/~6%. No dividend declared as expected.

Lower impairment allowances enhancing growth. YoY, 9MFY17 of RM5.38b rose strongly by +17% underpinned by: (i) improved top-line of +7%, (ii) lower impairment allowances (-25%), (iii) spectacular performance from associates and JV (+65%), and (iv) lower tax rate by 2ppts to 23%. Top-line was supported by fund-based income (+6%), Islamic banking income (+21%) mitigated by a slight decline in feebased income (-1%). Fund-based income was driven by modest improvement in loans vs. industry’s 5.2% coupled with NIM improvement of 4bps. Credit charge of 0.49% was below our expectation of 0.53% with lower impairments of other assets (-83%) supporting the lower impairment allowances. CIR was up by 2bps to 49% as opex outpaced top-line. At the PBT level, Malaysia is still the biggest contributor at 70.6%% (but lower than 9M16’s 77.33%) with overseas contributions improving:- Indonesia at 8.7%% (vs. 9M16: 8.4%) and others at 11.0% (vs. 9M16: 4.1%). However, contributions of Singapore fell by 60bps to 9.6% (as a % to PBT). QoQ, 3Q17 CNP grew by 22% underpinned by falling impairment allowances (-51%) as top-line was soft at +2%. Top-line was driven by Islamic banking income (+5%) and fee-based income (+2%) with fund-based income soft at +1% Soft fund-based income was underpinned by soft loans (+1%) and NIM compression of 2 bps to 2.2%. Credit charge was down by 39bps to 0.32%.

Management is treading cautiously ahead, revising its loans target to ~3% (from 6-7%) due to weak 1H and moderate contribution from overseas. 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 slightly, 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.

Revised earnings. We revised our FY17E/FY18E earnings by +3%/- 5% to RM6.64b/6.41b on account of lower impairment allowances on other financial assets & moderate loans ahead.

TP reduced, but call maintained. Our TP reduced to RM9.25 based on a FY18E 1.25x PB implying 0.8SD 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 7.2% (from 7.5%, (ii) FY18E ROE of 8.3% (8.8% previously), and (iii) terminal growth rate of 2.5% (unchanged). Although the stock offers an excellent dividend yield of 5.6%, we continue maintain our MARKET PERFORM call on concerns of higher-than-expected credit costs from a potential upside risk in NPL.

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

Source: Kenanga Research - 4 Dec 2017