Netting off the one-off write-back on improved staging under MFRS9, 1Q18 still came in above on lower-than- expected impairment allowance. Absence of dividend was expected. We still expect gross loans to grow 3-4% driven by Corporates and Mortgages. NIM should still be hovering at 3.4% with no material impact from OPR hike (if any) as 99% of its deposits are FD-based. Post earnings revision (+6%/+5%), we raised our TP to RM1.40. Maintain OP.

Above expectations. A much stronger 1Q18 CNP of RM161.4m was reported (+30% QoQ; +59% YoY) which made up 34%/31% of our/consensus full-year estimates. Note that CNP has been adjusted for the huge write-back of impairment allowances on loans and financing amounting to RM155.4m (which resulted from the prudent impairment allowances done back then for the new accounting standard MFRS9). Even so, the results still beat expectations with the positive deviation being its lower-than-expected impairment allowances recorded in the quarter. Absence of dividend was expected as the group typically only declare dividend in its 4Q results.

YoY, 1Q18 total income decreased by 5% dragged by both lower net interest income (-4%) and Islamic banking income (-8%). Net interest margin (NIM) trended lower, at 3.05% (-0.33ppts) due to the acquisition of only Shariah-compliant financial assets and the continued conversion of conventional loans to Shariah-compliant financings. On the other hand, the lower Islamic banking income was due to the higher cost of funds coupled with the acquisition costs of Asian Finance Bank Berhad (subsequently renamed as MBSB Bank Berhad). While Cost-to- Income ratio climbed up to 26.7% (from 19.7% in 1Q17) mainly on higher wages with headcounts added from 1,565 to 1,711 (at group level) alongside effective tax rate higher at 22.6% (+2.5ppt), headline NP shot up to RM316.8m (+130%) on write-back of impairment allowances on loans and financing amounting to RM155.4m. Netting-off the write-back, core NP was still up by 59% on much lower provisions for loans losses. On other key matrices, despite falling gross loans at - 2%, deposits continued to inch up by 4% YoY, which led to improved gross Loan-to Deposit ratio of 106% (-6ppt). Meanwhile, asset quality improved with Gross Impaired Loans ratio falling by 3.2ppts to 4.8% (due to disposal of Non-performing loans to Assets Held for Sale). All in, annualised ROE surged by 3.6ppt to 9.0%. QoQ, despite normalisation of total income (-9%) from high base in 4Q17 (on much lower interest expense back then) thus lowering NIM (at 3.12%, - 0.44ppt), while CNP improved by 30% on account of falling impairment allowances.

Transitioning for better growth. Following the completion of MBSB Bank acquisition (previously known as Asian Finance Bank Bhd), the first vesting of Shariah-compliant assets and liabilities has been carried out. Meanwhile, business, policies and operations have been realigned following the acquisition, with new investments being made to upgrade and improve the delivery products and services at various channels, including internet and mobile banking. We still expect loans to grow 3- 4% 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. On hindsight, NIM will still be hovering at 3.4% (one of the highest among the Banks and NBFIs) with no material impact from the OPR hike as 99% of its deposits are FD-based.

Maintain OP with a higher TP of RM1.40 (from RM1.35). Post results, we further lower our assumption in impairment allowances with our FY18E/FY19E earnings raised by +6%/+5%. All in, TP revised upwards to RM1.40 (from RM1.35) still based on an unchanged blended FY18E PB/PE of 1.1x/17.0x (representing 5-year mean).

Source: Kenanga Research - 30 May 2018