FY18 results came in within, so was the total DPS. For FY19, the group will continue to scale up its new initiatives by enhancing loan growth, preserving margins (NIM at c.2.4% and CIR of <50%) alongside decent ROE targeted at c.10%. While the short-term setback could be the higher CIR, improvement is already showing at top line, with better scale to achieve higher efficiency eventually. Maintain MP with a higher TP of RM4.40.

Within expectations. As anticipated, a weaker 4Q18 CNP of RM112.9m (-8% QoQ, -4% YoY) was reported, bringing FY18 CNP to RM493.2m which made up 100%/97% of our/consensus full-year estimates. Meanwhile, a second interim net DPS of 6.8 sen was also declared, bringing to total DPS of 15.3 sen.

YoY, FY18 total income improved by 7%, which is the highest in the past five years, all on the back of broad-based growth of net interest income (+5%), fee-based income (7%) and Islamic banking income (+11%). Note that improvement of lion’s share net interest income (57% of total income) was on the back of better risk adjusted return (RAR) loans growth (+19% driven by SME and new growth from Alliance One Account), with NIM remaining strong at 2.40% (+14bps YoY). This is alongside the recent OPR hike of +2bps, with improved loan mix. All that being said, PBT was flat (+1%), with decent top-line growth negated by higher CIR of 50.5% (+3.4ppt) on transformation investments of RM74.2m which includes restructuring costs, scaling-up sales personnel as well as marketing expenses. Minus the expenses, CIR would have been recorded at 46.0%. With higher effective tax rate (ETR) of 28.0% (3.2ppts), core NP declined 4%. QoQ, despite better total income (+4%) predominantly driven by better fee-based income (+11%, which was helped by realised gain from available for sale investment) and lower ETR of 26.6% (-5.6ppts), CNP dropped by 8% on higher allowances made for loans impairment losses.

Transformation in progress. Recall that the group has initiated a few measures, i.e. introduction of Alliance One Account (with loans/financing in one place) by means of pushing higher loan approval, higher loan disbursements, especially in the SME segment, aggressive CASA accounts acquisition among foreign and local employees as well as branch transformation through digitalisation to grow its loans growth. Note that loans growth has started to gain traction, from -0.5% in the past six quarters to +2.5% in the latest quarter though accompanied by higher CIR of 50.5%. While management noted that there are still some investment costs to be incurred c.RM50m (vs RM74.2m in FY18) before normalisation of CIR, the group is aiming to keep it below 50% by end of FY19. For FY19, the group will continue to scale up these initiatives, with aim to achieve >10% loans growth, alongside maintaining its NIM at c.2.4%. All in, while we are more conservative with our FY19E gross loans growth at 6.8% considering the current sluggish market condition, our NIM forecast of 2.43% is in line with the group’s target with CIR expecting to hover at 49.5-50.1%.

Maintain MARKET PERFORM with a higher TP of RM4.40 (from RM4.25). Post model updates, we tweaked our FY19E CNP by +2% while introducing FY20E CNP of RM563.9m (+4%); with driver assumptions being: (i) loans growth of 7-9%, (ii) NIM of 2.42-2.43%, (iii) CIR of 49.5-51.5% and (iv) ROE at 9.35-9.43%. All in, we raised our TP to RM4.40 (from RM4.25) which is still based on a blended FY19E PBV/PER ratio of 1.19x/12.6x (close to their respective 5-year mean). Maintain MARKET PERFORM.

Source: Kenanga Research - 01 Jun 2018