6M18 earnings exceeded our expectations on account of better-than-expected Islamic banking income and lower impairment allowances. However, we lowered our TP on risks and challenges ahead.

Exceeded expectations. 6M18 CNP of RM1.16b exceeded our expectations but in line with market accounting for 59% and 54% of full- year estimates, respectively. The positive deviation was due to unexpected lower impairment allowances, enhanced NIM, and higher contribution from Islamic banking income. A DPS of 7.5 sen was declared (in line).

Falling NOII. YoY, CNP registered a +16% growth due mainly to lower impairment allowances (-42%) despite a top-line improvement of +8%. Top-line improvement was mitigated by moderate NOII (+3%) on weak fee income (-6%) and declining gain in financial assets (-41%). Improved NII (+7%) driven by enhanced NIM (+20bps vs. expectations of 1bps compression – (i) as funding costs were prudently managed due to redemption of higher funding debts, (ii) contained liquidity, and (iii) OPR hike in Jan 18) as loans slowed to +1% (vs. expectation/guidance of 5-6% and system loans of +5%). CIR was within guidance of <50% registering at 49% despite a +7% uptick in opex, as top-line growth outpaced opex. Asset quality was mixed with uptick in GIL (+9bps) to 2.4% but credit charge was below estimations, falling by 6bps to 0.23% with lower impairments on other assets due to improved ratings and absence of impairments on its O&G assets. Further improvement in credit costs, falling 7bps to 0.19%. QoQ, no further progress with CNP falling 4% to RM5,760.2m, dragged by top- line (-9%) despite falling impairment allowances (-61% to RM45.2m). Top-line was dragged by falling NOII (-45%) mitigated by improved Islamic banking income (+35%). With loans falling (-2%) and moderate increase in NIM (5bps) NII surged to <1%.

Loans target revised down. With uncertainties externally, management revised down its loans target from 6% to 3-4% to be driven by mortgages and SMEs with the strategic focus to rebalance its Retail & SME/Corporate to 75%/25% from the current 69%/31%. The drive in mortgages will drive Islamic income with financing consisting of 31.5% of total loans. We understand that under FIT22, target is 40% for Islamic financing contribution mostly driven by mortgage. Islamic NPL is lower than conventional at 0.9%. While NIM for 1H18 was exceptional, management guided for 5-6bps widening of NIM for FY18 due to repricing of deposits in 2H18. Management maintained its credit costs guidance of 30bps on confidence of stable energy prices and economy with low unemployment.

Revised forecasts, while our FY19E earnings are revised down by 1%, our FY18E earnings are maintained although a few assumptions are revised such as; (i) loans growth lower (from +5.5% to +3.5%), (ii) NIM with 2bps enhancement (previously flattish), (iii) CIR (from <50% to <49%), (iv) slashing down our NOII by 7% and revising up our Islamic banking income by 8%. TP and call lowered. TP reduced to RM5.75 (from RM6.15) using PB/PE of 0.89x/10.7x (from 0.95x/11.3x) with the PB multiples are based on their 5-year mean with a 0.5SD below to reflect on challenges and uncertainties ahead. We feel this is justifiable given that the stock had been trading between 0.8x-0.9x in the last 12 months. Downgrade to MARKET PERFORM

Key risks to our call are: (i) steeper margin squeeze, (ii) slower-than- expected loans & deposits growth, (iii) higher-than-expected rise in credit charge and further slowdown in capital market activities, and (iv) adverse currency fluctuations.

Source: Kenanga Research - 03 Sep 2018