No surprises with 12M17 core earnings of RM5,470m coming within expectations and accounting for 101%/104% of our/consensus estimates. A DPS of 61.0 sen (in line) was declared. TP raised to RM22.35 (due to minimal impact of MFRS9) but maintained our MARKET PERFORM call. FY17 matched our forecast.

FY17 CNP of RM5.47b was in line, accounting for 101%/104% of our/market estimates. DPS of 61.0 sen was within our estimate of 60.0 sen representing a pay-out of 43.7% vs. ours at 43.0% (FY16: DPS of 58.0 sen).

YoY, no surprises but loans softening. FY17 CNP was better than the year before, improving by +5.1% to RM5.47b. Top-line was strong at +7.9% underpinned by higher performance from both fund-based income and fee-based income (at +7.2% and +11.3%, respectively) with Islamic banking income showing commendable performance at +6.1%. Fund-based income improved as NIM surged by 7bps (vs. our estimate of 1bps) as the group's total p loans moderated to +3.6% (vs. management’s guidance/our estimates of >4%/~4%). However domestic loans outperformed the system at +4.6%. Growth in feebased income was driven by strong performance from unit trust income at +16.5%, contributing 39% of fee-based income from 36% the year before. Asset quality continued to be stable with GIL stable at 0.5% and credit costs at 7bps (vs. management’s guidance/our estimates of 15bps. CIR continued to be commendable at 31.9% (vs. industry’s 48.1%). QoQ, CNP was up by +5.7% to RM1.49b, underpinned by falling opex (-3.8%) and impairment allowances (-72.3%) as top-line moderated to +2.3%. Top-line moderated as Islamic banking income and fee-based income slowed to +0.9% and +6.1%, respectively, with fund-based income stable at +1.3%. Fund-based income was stable due to steady loans (+1.0%), and NIM (2.23%). Asset quality remained consistently in good health as GIL remained at 0.5% and credit costs felled 9bps to 0.03%.

Cautious still but minimal impact from MFRS9 ahead. As with FY17, management guided for a cautious outlook for 2018, maintaining its prudency and operational efficiency ahead as such loans will be soft. Lending focus will still be on residential properties (the mass affordable segment) and the mid-market SMEs while the HP segment is expected to be soft with the focus on preserving asset quality. With a target of stable to mid-single digit NIM improvement, deposit growth will be moderate with growth being balanced by funding costs. Surprisingly, management guided for a credit cost of ~15bps for FY18 due to its strong asset quality, good asset history and strong credit recovery. Management added that due to its strong Regulatory Reserves of RM2.4b which pushes its Loan Coverage Ratio to 245%, impact on CET1 will be minimal under MSFR9.

Higher earnings ahead. We revised our FY18E earnings by +4% to RM5.64b to account for lower credit costs and lower CIR. We introduce our FY19E earnings where we expect earnings to improve by 8% on account of better loans, improved NIMs and stable credit costs.

TP revised with MARKET PERFORM call maintained. As FY18E numbers are tweaked slightly upwards, we raised our TP to RM22.35 (from RM21.45) based on a blended 2.4x FY18E P/B (unchanged) and 14.8x FY18 P/E (14.4x previously). The PB/PE multiples are based on their 3-year average given its consistent performance, excellent operating efficiency, stable asset quality and moderate loans. We, however, maintained our Market Perform call as valuations are demanding with a potential upside on returns of only ~3% to our TP.

Source: Kenanga Research - 23 Feb 2018