1Q19 results came in within, so was the absence of DPS. For FY19, the group will continue to scale up its new initiatives by enhancing loan growth, preserving margins (NIM at c.2.4% and CIR of <50%) and decent ROE targeted at c.10%. While the short-term setback could be the higher CIR, improvement is already showing at the top-line, with better scale to achieve higher efficiency eventually. Maintain MP with an unchanged TP of RM4.40.

Within expectations. A stronger 1Q19 CNP of RM136.4m (+21% QoQ, +1% YoY) was reported which made up 25%/24% of our/consensus full-year estimates. Note that this is the highest quarterly net profit for the last 15 quarters, which is starting to reflect fruition from its transformation programme. Meanwhile, absence of DPS was expected.

YoY, 1Q19 total income improved by 4%; with strong growth in net interest income (+8%) and Islamic banking income (+6%), negating the slower non-interest income performance (-11%). Note that improvement of lion’s share net interest income (61% of total income) was on the back of higher better risk-adjusted return (RAR) loans contribution (+21%, to 37% by SME and new growth from Alliance One Account), with NIM remaining solid at 2.43% (+11bps YoY). This is alongside the recent OPR hike of 2bps, with an improved loan mix. However, PBT remained flat at RM136.4m (<1%), with decent top-line growth negated by higher CIR of 45.7% (+0.1ppt) on transformation investments which include restructuring costs, scaling-up sales personnel as well as marketing expenses. With marginally lower ETR of 24.7% (-0.3ppts), core NP inched up by 1%. QoQ, despite lower total income (-0.6%); with decent NII improvement of 9% erased by lower treasure income (-11% at non-interest income) on lower realised gain from available-for-sale investment, net profit increased by 21% on lower CIR (on seasonality as well as normalisation from the high base in 4Q18, which saw the transformation investments, i.e. restructuring costs, scaling-up sales personnel as well as marketing expenses) alongside lower ETR of 24.7% (-1.9ppts).

Transformation in progress. Recall that the management targets to achieve: (i) >10% loans growth, (ii) NIM to maintain c.2.4%, (iii) CIR <50%, (iv) net credit cost c.35bps, (v) ROE at c.10%, and (vi) dividend policy of up to 60%. Thus far, 1Q19 NIM (at 2.43%), CIR (at 45.7%) and ROE (at 10.2%) are in line with guidance. Meanwhile, the group typically only declare dividends on the 2Q and 4Q. To achieve such target, the group has initiated a few measures, i.e. introduction of Alliance One Account (with loans/financing in one place) by means of pushing higher loan approval, higher loan disbursements, especially in the SME segment, aggressive CASA accounts acquisition among foreign and local employees as well as branch transformation through digitalisation to grow its loans growth. Note that loans growth has started to gain traction, from -0.5% in the past few quarters to +3.8% in the latest quarter. For CIR, while management noted that there are still some investment costs to be incurred before normalisation, the group is aiming to keep it below 50% by end of FY19. All in, while we are more conservative with our FY19E gross loans growth at 6.8% considering the current sluggish market condition, our NIM forecast of 2.43% is in line with the group’s target with CIR expecting to hover at 49.5-50.1%.

Maintain MARKET PERFORM with an unchanged TP of RM4.40. We made no changes to our FY19E/FY20E CNP; while maintaining our driver assumptions of: (i) loans growth of 7-9%, (ii) NIM of 2.42-2.43%, (iii) CIR of 49.5-51.5%, and (iv) ROE at 9.35-9.43%. Our valuation is still based on a blended FY19E PBV/PER ratio of 1.19x/12.6x (close to their respective 5-year mean).

Source: Kenanga Research - 03 Sep 2018