Coming from a recent management meeting, we believe that that its loan traction will continue for 1HFY19, with credit costs likely lesser than expected. (5%-7% YoY). Asset quality likely to improve significantly by end of FY19E. Reiterate our OUTPERFORM call with an unchanged TP of RM4.50

Momentum expected to be maintained. We expect 1H19 loans to be at least comparable as 1H18 (+6.6% YoY) with loans to be underpinned by SMEs, Mid-Corp and supported by the credit card space. A healthy pipeline indicates loans growth of ~6% YoY is achievable for FY19E. While concern of on-going global trade friction is prevailing, risks for the domestic SME space might not be so prevalent, as both China and US might use other markets, including Malaysia as intermediaries to bypass the tariffs imposed. Hence management view that its SME’s growth will not be affected in the long run. SME’s are still focused on manufacturing, service and trade, which are mostly export and consumer based, hence underpinning the resiliency of its SME segment. Augmenting its Business Banking segment further will be its focus on small players (infra and construction sectors) with average disbursements of RM3-5m ; thus, unlikely to be involved in the sensitive infra and construction projects.

Pre-emptive measures. We are positive on its steps to further protect its asset quality moving ahead especially in the mortgage space given the resilient household likely undermined by the potential slowdown in the economy. We understand that management have taken steps i.e. i) Aiming for a lower LTV, ii) Shying away from borrowers whose income are <4k. We understand that its residential properties approval has dipped <70% mark, consistent with BNM’s recent findings that this sector’s approval in the system at <70%. Another positive note is that 80% of its mortgages are owner occupied with average ticket size for its residential property financing are 250-400k/unit.

Likely lower GIL. While GIL for 1Q19 stands at 1.8% (or RM1.74b) we understand that RM600m are real estate related and spread over 3 different accounts. However, steps are being taken to sell of these NPLs with sufficient buffer (2 to 3x) to recover these loans by end of FY19, which will reduce its GIL to 1.1%. We also expect that credit charge will be benign for FY19. Recap that management expect credit cost to normalize for FY19 and in fact, 1Q19E saw a credit recovery (of 4bps). We understand from management that credit charge will be lower than the estimation of 20-30bps (due to proactive credit recoveries across the board with retail recurring and corporate episodic).

No change in earnings. We make no changes to our FY19E earnings of RM1.20b as we feel our assumptions are conservative enough; i) loans at ~6%, ii) flattish NIMs and iii) credit charge of 20-30bps, iv) ROE at 7.1%.

TP maintained at RM4.50 based on a blended FY19E PB/PE ratio of 0.7x/11.2x with 1SD below its 5-year mean to reflect normalization of credit costs and potential slower loans due to external conditions. Dividend yield is still attractive at 4.0% and coupled with potential upside of 16%; we reiterate OUTPERFORM on account of decent loan growth traction and benign credit cost.

Source: Kenanga Research - 19 Oct 2018