1H18 core NP came in within expectations, so was the absence of dividend. We still expect gross loans to grow 3- 4% driven by corporates and mortgages. NIM should still be hovering at 3.4% with no material impact from OPR hike (if any) as >95% of its deposits are FD-based (inclusive of Commodity Murabahah portion). No change in our earnings estimates, but we roll over the valuation base year to FY19. Maintain OP with a higher rollover TP of RM1.45.

Within expectations. MBSB reported 2Q18 CNP of RM85.7m (-47% QoQ, -6% YoY), bringing 1H18 CNP to RM247.1m (+28%) which made up 48%/39% of our/consensus full-year estimates. Note that the 1H18 CNP has been adjusted for the huge write-back of impairment allowances on loans and financing amounting to RM155.4m in 1Q18 (due to the then prudent impairment allowances for the new accounting standard MFRS9). Absence of dividend was expected as the group typically only declare dividend in tandem with 4Q results.

YoY, 1H18 total income decreased by 4%, dragged by both lower net interest income (-6%) and Islamic banking income (-4%). Annualised NIM trended lower, standing at 3.23% (-0.17ppt) due to the acquisition of only Shariah-compliant financial assets and the continued conversion of conventional loans to Shariah-compliant financings during the 1Q18. On the other hand, the lower Islamic banking income was due to the higher cost of funds coupled with the acquisition cost of Asian Finance Bank Berhad (subsequently renamed as MBSB Bank Berhad). While Cost-to-Income ratio climbed up to 28.6% (from 21.4% in 1H17) mainly on higher wages with headcounts added from 1,576 to 1,863 (at group level) alongside effective tax rate higher at 23.9% (+3.2ppt),

headline NP shot up to RM402.5m (+109%) on write-back of impairment allowances on loans and financing amounting to RM155.4m. Netting-off the write-back, core NP was still up by 28% on much lower provisions for loans losses. On other key matrices, while gross loans declined 1% (on sales of personal, property and mortgage financing), deposits declined further at 4% YoY (which led to higher gross Loan-to-Deposit ratio of 115% from 112%); such restructuring yielded in better asset quality with Gross Impaired Loans ratio falling by 2.9ppts to 5.5%. All in, annualised ROE improved by 1.1ppt to 6.8%.

QoQ, while total income improved by 3% thanks to normalised Islamic Banking income (thus higher NIM), NP declined by 73% on normalised allowance for impairment losses recorded at -RM124.2m, vis-à-vis write-back for impairment losses of RM154.4m in 1Q18 on prudent impairment allowances made back then.

Transforming for better growth. Following the completion of MBSB Bank acquisition (previously known as Asian Finance Bank Bhd), the first vesting of Shariah-compliant assets and liabilities has been carried out. Meanwhile, business, policies and operations have been realigned following the acquisition, with new investments being made to upgrade and improve the delivery products and services at various channels, including internet and mobile banking. We still expect loans to grow 3- 4% driven by corporates and mortgages. Recall that the Corporate Financing (CF) disbursement YTD is RM2.0b, with unutilised CF stood at RM7.1b as of June18. For 3Q18, Corporate Financing expected to disburse RM700m. Meanwhile, Personal financing will still be the core of its loans/financing but likely to be selective on asset risk concerns. On hindsight, NIM will still be hovering at 3.4% (one of the highest among the Banks and NBFIs) with no material impact from the OPR hike as >95% of its deposits are FD-based.

Maintain OP with a higher rollover TP of RM1.45 (from RM1.40).

Post results, while we made no changes to our earnings estimates, we roll over our valuation based year to FY19. All in, TP revised upwards

to RM1.45 based on a blended FY19E PBV/PER of 1.1x/17.6x (representing 5-year mean).

Source: Kenanga Research - 31 Jul 2018