Although 1Q18 results are in line with our/market estimates, we slash our FY18E/FY19E earnings on challenging loans post GE14. We reduce our TP to RM4.90 as we roll over to FY19E but maintain our OUTPERFORM call as returns are superiorly attractive due to steep fall in share prices.

In line. 3M18 CNP of RM172m is in line with our/consensus expectations accounting for 21%/26% of estimates. No divided was declared as expected.

Slower loans but NFM expanded. 3M18 CNP of RM172m improved on the back of broad based top-line growth. Both Income from Takaful Business and Income from Investment of Depositors & Shareholders’ fund improved at +11% and 9% YoY, respectively. However, financing growth was below target/expectations of ~10% growing at +7% YoY (vs systems growth of +4.4% YoY) due to large corporate repayments. Net income from investment of depositors expanded by +9% due to expanded NFM of 5bps (to 2.4%) as guided and expected. Slight deterioration in asset quality seen with a 4bps uptick to 1% with credit costs up by 11bps to 0.20% (vs our estimate of 0.26%). Opex expanded by 4% but CIR fell by 2ppt to 52.2% (vs industry growth 48%) of as revenue growth outpaced opex.

QoQ, CNP improved by 15% bolstered by surging Takaful business at +20% QoQ). Income from Investment of Depositors & Shareholders’ Fund fell 1%, mitigated by income from investment of depositors (+5% QoQ) as investment of shareholders’ funds fell 15% QoQ. Financing moderated to 1% QoQ but NFM continued to expand by 6bps to 2.4%.

Lower loan target. Management revised its 2018 loans target from ~10% to +8% on concerns of moderate corporate contribution post GE14. Loans growth prospect will still be supported by SME, consumer and commercial. Its target of 50/50 Personal Financing/Mortgage is on track with contribution mix of 45/55 as at end-1Q18. While NIM performed as guided initially, management expects flattish NIM for FY18 due to higher funding costs (from CAGAMAS/issuance of Sukuk) to comply with NSFR by 2019. CIR is expected to be in the 59-60% range as bulk of the costs of digitization/transformation is expected to be incurred in 2H18.

Earnings revised down. Our FY18E earnings is slashed by 26% to RM606m on account of: (i) lower loans of ~8% (from ~11 previously), (ii) flattish NFM (from 5bps expansion previously), and (iii) CIR of 60% (from 56% previously). Our FY19E earnings estimate is also revised down by 27% to RM683m based on the following assumptions: (i) loans at 9% (from 14% previously), (ii) NFM expanding by 5bps (from flattish), and (iii) CIR at 59% (from 58% previously).

TP revised but OUTPERFORM call maintained. We roll over our valuation to FY19E with a lower TP of RM4.90 (from RM5.20 previously) based on a blended PB/PE ratio of 1.6x/11.9x. This is based on the 0.5SD-level below 5-year mean to reflect the risk of growing loans ahead post GE14. With ROE (at 13%) second only to Public Bank and potential total returns of ~30% we maintain our OUTPERFORM call.

Downside risks to our call are: (i) lower-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, and (iii) worse-than- expected deterioration in asset quality.

Source: Kenanga Research - 31 May 2018