No surprises for 3M18 as core earnings of RM1.40b came within expectations, accounting for 25%/24% of our/consensus estimates. No dividend declared as expected. TP is raised to RM24.65 but MARKET PERFORM call maintained.

No surprises, expectations met. 3M18 core net profit (CNP) of RM1.40b is in line, accounting for 25%/24% of our/market estimates. Earnings were supported by strong top-line with moderate increase in opex and impairment allowances. As expected no dividend declared in the 1Q.

Strong fee-based income. 3M18 CNP of RM1,405m improved by +12.6% YoY supported by strong top-line of RM2,758m (+6.6% YoY). The strong top-line was supported by strong fee-based income (+15.6%) with steady Islamic banking income (+7.3% YoY) and moderate fund-based income (+4.0% YoY). The moderate growth in fund-based income was driven by improved NIM by 3bps (vs. our expectation of 1bps) as the group’s total loans growth moderated to +3.4% YoY (but strong domestic loans of +5.0% YoY surpassed domestic system performance of +4.4% YoY) vs. guidance/expectation of ~5% YoY. Asset quality continued to be uphold as gross impaired loan (GIL) ratio was steady at 0.5% with credit charge at 0.09% (vs. guidance/estimate of 0.15%/0.15%). Cost to Income (CIR) ratio maintained its excellent position among peers at 32.6% (vs. guidance/expectation of 33-34%/32%) with industry CIR at 47.3%.

Sequentially weaker attributed to seasonal factors. QoQ, earnings fell by 5.4% YoY as top-line fell with higher opex and impairment allowances. Top-line (-1%) was dragged by fee-based income (-7.9%) with Islamic income growth at +5.1% but marginal fund-based income (+0.5%). The marginal fund-based growth was attributed to marginal loans (+0.8%) and upside in NIM by 1bps. Asset quality was mixed as GIL was steady at 0.5% but credit charge rose by 6bps to 0.9%

Strong asset quality. Although fee-based income was weak sequentially, we understand this was due to seasonality and we are expecting tweak-ups in the coming quarters. Despite domestic lending surpassing system lending, lending focus will still be on residential properties (the mass affordable segment) and the mid-market SME while the HP segment is expected to be soft with focus on preserving asset quality. The emphasis on selective and preserving asset quality have consistently produced a steady and low GIL ratio; thus, we expect a much lower credit charge for FY18 than the 0.15% previously guided.

Forecast earnings revised slightly. Although results are in line, we tweaked slightly our conservative forecasts for FY18E/FY19E by +2.3%/+2.1% to RM5.78b/6.25b as we reduced our credit charge estimation from 0.15%/0.16% to 0.10%/0.11%.

TP revised with MARKET PERFORM call maintained. As FY18E/FY19E numbers are tweaked slightly upwards, we raised our TP to RM24.65 (from RM22.35) as we roll over our valuation to FY19 based on an unchanged blended 2.4x FY18E P/B (unchanged) and 14.8x FY18 P/E (14.4x previously). The PB/PE multiples are based on their 5-year average (with +0.5SD) given its consistent performance, excellent operating efficiency, stable asset quality and moderate loans. We, however, maintain our Market Perform call as valuations are demanding with a potential upside of only ~5% to our TP.

Key risks to our earnings estimates are: (i) steeper margin squeeze, (ii) slower-than-expected loans & deposits growth, (iii) higher-than- expected rise in credit charge and further slowdown in capital market activities, and (iv) adverse currency fluctuations.

Source: Kenanga Research - 03 May 2018