FY17 core earnings of RM417m came above expectations accounting for 125%/113% of both house/market full-year estimates, attributed to lower-than-expected impairment allowances. A final DPS 5.0 sen was declared (vs. our expectation of 1.0 sen). We raised our TP to RM1.35 and maintain our OUTPERFORM call due to undemanding valuations.

Exceeded expectations due to lower impairments. FY17 core net profit (CNP) of RM417.1m exceeded our/consensus estimates, accounting for 125%/113% of full-year estimates. The higher-than- expected numbers were due to: (i) lower-than-expected impairment allowances (by -8%), and (ii) lower cost of funds at 0.41% (vs. 0.70% as initially expected). On a YoY basis CNP surged by 107% on account of lower impairment allowances falling by 23% YoY to RM598.6m.

Improving earnings but falling loans. FY17 earnings surged 107% underpinned by: (i) lower impairment allowances, (ii) top-line improving by +5%, and (iii) normalized tax rate at 22% (vs. FY16: 41%, due to reversal of deferred tax assets). Top-line was boosted by a strong fund- based income by +62% to RM320.0m with Islamic banking income falling by 2%. Fund-based income was boosted by strong Net Profit/Interest Margin (NIM) improving by 13bps to 3.44% as loans/financing fell by 3% YoY (vs. our expectations/guidance of <4%). Improved NIM was the results of lower funding costs. Despite falling loans at 3.1%, deposits were strong at +7% YoY; hence, reported Financing/Loans to Funding Ratio fell by 4ppts to 92%. Asset quality improved with GIL falling by 4ppts to 5% (due to disposal of Non- performing loans to Assets Held for Sale) with credit costs down by 70bps to 1.7% (from 1.9% initially guided). Annualised ROE surged by 250bps to 6% (from our expectation of 5%). QoQ, similar to its full-year results, CNP improved by +23% to RM124.0m on account of falling impairment allowances by 30% Top-line nudged higher by +3% on account of strong fund-based income (+35%). However, loans fell by 5% with improved NIMs (up by 18bps to 3.56%) supporting fund-based growth. Similar to falling loans, deposits fell by 1%.

Challenging earnings. Despite the soon to be operational new Islamic Banking entity in March 2018, management highlighted sombre growth for 2018. Loans are expected to grow around the 3-4% range driven by corporates and mortgages. Personal financing will still be the core of its loans/financing but likely to be selective on asset risk concerns. Moderate loans, higher opex (due to the new merged entity and digitization) and higher-than-expected credit costs, management guided for a moderate ROE of >6%. On hindsight, NIM will still be strong at ~3.4% with no material impact from the OPR hike as 99% of its deposits are FD-based.

Forecasts. We slashed our FY18E earnings by 17% to RM481m as we pencilled in slower loans (~3% YoY), higher CIR (30%), and higher credit charge of 1.3% with ROE at 6.6%. We introduced our FY19E earnings of RM514m (+6.8% YoY) based on the following assumptions:- (i) loans growth of +4% YoY, (ii) CIR of 30%, (iii) credit costs of 1.2% with (iv) ROE at 6.7%. TP revised slightly upwards to RM1.35 (from RM1.30) based on a blended FY18E PB/PE of 1.1x/17.0x (from 0.93x/14.5x). The PE is based on its 5-year mean of 17x with the higher PB (0.5 SD below mean) to reflect a more visible earnings projection albeit a conservative one, post its impairment programme. Maintain OUTPERFROM as total returns are still >10%.

Risks to our call: (i) higher-than-expected margin squeeze, (ii) lower- than-expected loans & deposits, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 02 Feb 2018