1Q18 earnings came within expectations with its FY18 targets mostly on track except loans growth. Nevertheless, we believe its +6% loan target is achievable while concerns on asset quality are receding with sustainable energy prices. TP raised to RM6.15 with an OUTPERFORM call.

Within expectations. Results are within expectations with 3M18 CNP at RM590.8m accounting for 29%/27% of our/market estimates. The positive deviation is attributed to better-than-expected NIM and lower credit costs incurred post MFRS9. No dividend was declared, as expected.

On track. YoY, CNP registered a +18% growth, as top-line growth (+14%) was driven by fee-based income (25%) with fund-based income and Islamic banking income at +9% each. Fund-based income was driven by stronger loans +4% (vs guidance of +6%, system loans of +4% and expectation of 5-6% range). Domestic loans surpassed system loans at +7% supported by higher expansion of NIM by 21bps (vs expectation of flattish NIM) attributed to the impact of OPR hike in Jan 2018 and higher CASA (uptick by 3ppt to a 29% ratio). CIR was within guidance of <50% registering at 49% despite a +13% uptick in opex. Post MFRS9, impact on GIL is negligible with GIL falling by 10bps to 2.3% with credit costs falling below guidance/target of 33//30bps to 21bps. QoQ was equally strong as CNP rebounded to +28% as top-line improved by +6% and impairment allowances falling by 47%. Fund-based income growth of +4% was supported by marginal growth in loans (+1%) but mitigated by NIM expansion of 10bps to 2.2%. Although GIL was a tad higher by 10bps QoQ at the end of 1Q, it was lower than Day 1 of MFRS9 at 2.4%. Impact of MFRS9 is muted with a 20bps slash to the Group’s CET1 to 13.7% (fully loaded) vs guidance of 50bps erosion.

Loans to be driven by mortgage and SME. Management maintained its loans guidance of ~6% as its involvement in sensitive projects is negligible. We still believe its loans target is achievable despite the uncertainties post GE14 as loans will be coming from mortgages, SME and mid-corp. Bear in mind that under its new FIT@22 strategic programme (as IGNITE 18 ends) loan portfolio will be rebalanced with Retail & SME/Corporate at 75%/25% from the current 69%/31% as it views corporate as volatile. While NIM for 1Q18 was exceptional, management guided for flattish NIM for FY18 due to repricing of deposits in 2H18. Management maintained its credit costs guidance of 30bps on confidence of stable energy prices and economy with low unemployment. On a positive note, its O&G exposure is reduced by 10bps to 2% of gross loans and with energy prices recovering, we believe concerns on its O&G asset quality has receded.

Maintained forecasts. We are comfortable with our following assumptions; (i) loans of 5-6%, (ii) credit costs of 33bps, (iii) flattish NIM, and (iv) CIR of ~49, and coupled with the in-line earnings, we maintained our FY18E/FY19E earnings of RM2.01b/2.2b. For FY19E our assumptions are; (i) loans ~6%, (ii) credit costs 25-30bps, (iii) slight uptick in NIMs (<5bps), and (iv) CIR of 48%. TP raised with Call maintained. As we roll over our valuations to FY19, we raised our TP to RM6.15 (from RM5.70) based on an unchanged blend of PB/PE of 0.9x/11.5x. The PB/PE multiples are based on their 5-year mean with a 0.5SD below to reflect on uncertainties ahead. Potential returns are exciting (~18%). Maintained at OUTPERFROM.

Key risks to our call 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 - 01 Jun 2018