Loans growth was a surprise at +6% exceeding target/expectations and we expect momentum to continue but earnings was dragged by one-off expenses. Nevertheless, moving forward we expect loan traction to continue but concerns on credit costs linger as AMBANK moves into the MFRS9 regime. TP revised down to RM4.50 but reiterate OUTPERFORM call due to the sharp price corrections.

Below expectations on account of one-off expenses. 12M18 CNP of RM1.13b is below/within our/market estimates accounting for 92%/96% of estimates, respectively. The negative deviation stems from higher opex and zero credit recovery vs our estimation of 4bps credit recovery. A final DPS of 10.0 sen was declared bringing the full-year DPS of 15.0 sen (below expectation of 20.0 sen)

Earnings dragged by higher opex. 3M18 CNP fell by 15% to RM.13b due to higher opex (from MSS initiatives and compliance costs amounting to RM203m). Stripping off these initiatives, CNP would have been at RM1.53b. The MSS (at RM146m) was higher than our expectations of RM120m. Top-line of +7% was commendable driven by Islamic banking income of +17%, mitigated by moderate fund-based income (+6%) and weak fee-based income (+2%). On a positive note, loans of 6% exceeded guidance/estimation of ~5%/<5% driven by mortgage (+21%), retail SME (>100%) and MidCorp (+7%). However, NIM was as guided and expected (flattish) at 2%. CIR of 61% was above target/expectation of 58% due to the one-off costs mentioned above. Asset quality improved with GIL falling by 20bps to 1.7% with exposure to O&G and commercial real estate at 2% and 8% of gross loans. As guided due to tapering recoveries, credit costs were at 0%. QoQ saw strong performance with CNP improving by 15% despite the MSS initiatives incurred in Q4. Strong top-line at 13% was driven by fee-based income of 30%. Fund-based income was at 4% with loans <+2% and better improvement in NIM by 5bps benefiting from the Jan 2018 OPR hike. Asset quality improved as GIL fell by 7bps and there was a credit recovery of 12bps.

Expect loans momentum to continue. Loans growth surprise is a testament to the Group’s initiatives with its T4 aspirations. Loans have been slowly gaining traction since 1Q17 and management guided for a +6% target for FY19 driven again by its mid-corp, SME and retail. Mortgage growth will move in tandem with the market. A plus point in loans growth is its loans exposures are well diversified into various sectors and not exposed to any controversial projects. We expect flattish NIM due to its high LDR in FY18 despite management expecting strong CASA coming from mid-corp and retail SME. Management further guided for CIR of <55% as MSS will lead to RM80m savings annually. Risk of higher credit costs is still in the cards, (as recoveries have ended and moving into the MFRS9 regime) with management guiding for a 20-30bps normalization of credit costs moving forward. For FY19, management reiterates its 40% dividend payout as it was for FY18.

We revised our FY19E earnings by -17% to RM1.2b on account for higher credit costs and challenging NIM. We introduce our FY20E earnings where we expect earnings to improve by +11% on account of higher loans, improved NIM and stable credit costs. TP revised to RM4.50 (from RM4.90) with call maintained. The TP is based on a blended FY19E PB/PE ratio of 0.8x/9.4x (unchanged) with a 1SD below their 5-year mean to reflect credit cost concerns. Dividend yield is still attractive at 4.5% coupled with potential upside of 27%; we reiterate OUTPERFORM.

Source: Kenanga Research - 01 Jun 2018