Bank of Chengdu continued its upward momentum (+50% YoY) contributing 16% to the group’s pretax profit as topline moderated, underpinned by soft loans and NIM. We expect Bank of Chengdu to maintain its upward momentum going into FY19. TP revised slightly upwards to RM20.15 but reiterate our MARKET PERFROM call.

In line. 12M18 CNMP of RM2.63b is in line, accounting for 106%/102% of our/market estimates on of account strong contribution from feebased income supported by strong contribution from its 18%-owned associate Bank of Chengdu (BOCD). A final DPS of 32.o sen was declared bringing the full-year DPS to 48.0 sen surpassing our expectation of 45.0 sen/share.

Robust BOCD. 12M18 CNP was driven by strong contribution from BOCD at ~16% of its PBT or at RM516m (>+47% YoY). Top-line moderated at +6% YoY driven by improving fee-based income (+14%) and Islamic banking income (+17%), offset by weak fund-based income of 1%. Weak fund-based income was underpinned by moderate loans (+3% vs. guidance/expectation/system growth of <3%/~3%/4%) and a 1bps compression in NIMs (vs. a 4bps expansion). CIR was at 43% (vs. guidance/estimation of 44% and industry’s 48%) as top-line outpaced opex. Asset quality strengthened as GIL fell 9bps to 0.87% with credit costs at falling by 11bps to 0.02% (vs. our expectation of 0.07%) on account of strong recoveries. ROE improved by more 2ppt to 11.3% (vs. guidance expectation of 10-11%. QoQ, CNP fell 9% as top-line fell 6% with BOCD performance falling by 14% (historically a slow quarter for BOCD). Top-line weaknesses was broad based as fund-based, feebased and Islamic banking income fell 3%, 2% and 14%, respectively. Fund-based income was dragged by compressing NIM (4bps as deposits cost catch up with the Jan 2018 OPR hike) with loans improving to ~3%. GIL was up by 3bps to 0.87% but credit charge fell 1bps to 0.03%

Loans moderate but BOCD expects to be robust. Management expects loans growth to be in tandem with system loans growth albeit moderate, driven again by residential property and SME. On a positive note, BOCD is expected to deliver another healthy performance ahead and we expect a higher pre-tax contribution to 16-17% as loans will be coming from the robust SME and government-linked projects. Coming into the MFRS9 era, management expects minimal impact to its CET1 expected to be eroded by 13bps for FY19E. Although management guided for a gross credit charge of 20-25bps, we do not discount of excellent recovery (as in FY18) thus expects credit charge of 10-15bps for FY19E.

Revised earnings. We revised up our FY19E earnings conservatively by +2% to RM2.6b on account of stronger contribution from BOCD and fee-based income but being offset by downside pressure on NIMs. We assumed; (i) loans at~5% (unchanged), (ii) CIR at 43% (from 44%), and (iii) 1bps compression in NIM (+5bps previously). We introduce our FY20E earnings, expected to improve further on account better loans and healthy contribution from BOCD.

TP revised with call maintained. Our TP is now at RM20.15 (vs. RM18.70 previously) based on an blended FY19E PB/PE of 1.7x/15.5x (1.54x/14.5x previously). Our valuation implies a 2.0SD above the PB 5-year mean. We feel this is justifiable given the robust contribution from BOCD and downside bias on credit charge ahead. Reiterate our call of MARKET PERFORM as total returns are <5%. The key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-thanexpected loans growth, (iii) worse-than-expected deterioration in asset quality, and (iv) weaker-than expected contribution from BoCD.

Source: Kenanga Research - 29 Aug 2018