Following a recent meeting with management, we reiterate our TP of RM6.85 and maintain the OUTPERFORM call. Management is positive of meeting FY18E targets (despite downside risks still lingering from both domestic and external fronts), and confident of hitting those targets; (i) ROE of 10.5%, (ii) loans growth of ~6%, (iii) NIMs contraction of 5-10bps, and (iv) credit charge of 55-60bps.
Loans growth achievable but facing downside risks. Management expects its loans target of ~6% to be doable on account of robust growth from the domestic front while loans growth is facing challenges in Indonesia and Thailand. The impending Presidential campaign is stifling loans growth in Indonesia with demand lacking from both corporates & SMEs while infra loans are coming down. Retail loans ex- auto are growing but face competitive challenge in retaining them and we expect Niaga’s FY18E loan target of mid-single-digit challenging. As for Thailand, growing loans is still challenging as the business environment is not conducive albeit satisfactory asset quality. Resilient retail loans. On the domestic front, retail loans (especially from mortgages) are resilient with corporates loans sliding and slower drawdown from corporate sector arising from the uncertainties of the business environment post GE14. Management is positive on clarity emerging by 4Q18, with pickups in corporate loan/drawdown and expects domestic loans surpassing domestic systems loans growth (1Q18: loans were at +8% vs. system loans of +4%).
NIM as guided. No change in management’s guidance of 5-10bps compression, with stable NIM expected from all markets with the exception of Indonesia which is expected to drag the overall group FY18E NIM. Indonesia is still facing downside pressure and likely to face a ~5% NIM as expected. On the domestic front, no further hike in interest rates is seen, thus stable NIMs are expected. However, management did highlight challenges of growing CASA domestically and is still pushing to grow CASA in Indonesia. Another factor that dragging NIM in Indonesia is the drag in corporate/SME loans to offset its mortgage book, which interest spread is low. Potential high side in credit costs. Management highlighted satisfactory asset quality across the board and maintains its group guidance of 55-60bps with Indonesia trending closer to 150bps overall (1Q18: 190bps). Management highlighted of potential higher side of group credit costs guidance to take into account of the expected loss calculations under the MFRS9 accounting due to the on-going trade friction globally. While management expects its FY18E ROE target of 10.5% is achievable, we do find further downside risks as management highlighted further risks coming from flattish NOII as domestic capital markets have been slow but are expected to show improvement in later months of the year.
Forecasts unchanged. Our FY18E earnings estimate is kept unchanged at RM5.1b, as we render existing assumptions to be conservative enough. Our FY18E assumptions are; (i) ROE at 10% (ii) Loans at 5% (iii) Credit cost of 58-60bps, and (iv) NIMs compression of 10bps.
Maintain TP of RM6.85 based on a FY19E PB/PE of 1.0x/12.4x. Both PB and PE are based on the 0.5SD level below the respective 5-year mean to price in of potential risks ahead. Maintain OUTPERFORM due to a potential upside of >20%.
Source: Kenanga Research - 26 Jul 2018
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