12M17 results are above expectations/in line, accounting for 113%/103% of our/consensus full-year forecasts stemming from lower-than-expected impairment allowances. A full-year DPS of 55.0 sen was declared (in line). Our TP is raised to RM10.60 to account for softer credit charge ahead. MARKET PERFROM maintained.

Above expectations. 12M17 CNP of RM7.52b is above our/in line with market estimates, accounting for 113%/103% of full-year estimates. The positive deviations stemmed from lower-than-expected impairment losses. A final DPS of 32.0 sen was declared bringing total DPS of 55.0 sen (above expectation of 50.0 sen).

Boosted by lower impairments. YoY, 12M17 NP of RM7.52b (+14%) was boosted by lower impairment allowances. Top-line moderated at +5% as fund-based income and Islamic banking grew +5% and 17%, respectively, dragged by contraction in fee-based income (-4%). Loans slowed at <2% (vs. expectation/guidance/system of 3%/3%/4%) but domestic loans accelerated ahead at +5%. NIM was stable at 2.1% (vs. guidance/expectation of 5bps/4bps enhancement). While asset quality was stable at 2.3%, credit cost of 40bps was lower than expected/guidance of 51/50bps as impairments fell by 33%. CIR of 49% was within guidance/expectation of 49%. ROE of 10.5% was within guidance but above ours of 9.3%. QoQ, CNP moderated at +5% as top-line was marginally soft at 1% despite impairments falling by 42%. Top-line was driven by fee-based income at 6% as both fund and Islamic banking contracted by 1% and 2%, respectively. Loans picked up by 40bps to <2% with NIM flat at 2.2%. Credit costs fell 16bps to 0.16%.

Positive on 2018. Management is positive for 2018, but guided for a mid-single digit loans growth as it expects Malaysia and Singapore to perform better but Indonesia be challenging. Despite the rate hike and the potential of further hike, it expects loans to be driven by retail with corporates picking in the later part of the year. NIM is expected to improve by 5bps with credit costs likely within the 40-45bps. Impact of MSFR9 will be 40bps for its CEt1. Management guided for cost discipline with CIR expected at 48% and targeted a ROE of ~11%.

Higher earnings. We revised our FY18E earnings by +18% to RM7.9b on account of lower impairment allowances, higher loans, enhanced NIM and introduce FY19E numbers.

TP revised with call maintained. Our TP is now at RM10.60 based on a blended FY18E PB/PE of 1.53x/12.73x. Our valuation implies a 1.0SD/-0.50SD above the PB/PE 5-year mean. We feel this is justifiable given that ROE will be boosted by lower impairment allowances but with challenging loans growth ahead from overseas. Maintain our call at MARKET PERFORM call as total returns are <10% due to the sharp appreciation in price.

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 - 01 Mar 2018