9M18 core earnings came in line, as impairment allowances fell as expected. Normalization of credit costs are expected for FY19 which will underpin bottom-line ahead. However, with the impending economic slowdown ahead, we reduce our TP to RM1.25 but OUTPERFORM call maintained due to still attractive valuations.

In line. 9M18 core net profit (CNP) of RM369.0m is in line with estimates, accounting for 72%/60% of our/consensus full-year estimates. Note that the 9M18 CNP has been adjusted for 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). No dividend declared as expected.

YOY underpinned by lower impairment allowances, 9M18 earnings surged 79% underpinned by lower impairment allowances falling by 94% to RM29m, as top-line fell 5% to RM1.05b. Falling top-line was dragged by declining fund-based income, down by 15% to RM177m while Islamic banking income fell 5% to RM828m. Loans saw a slight drag (-1% vs. expectation/guidance of 3-4%) mostly coming from a decline in personal financing (PF) (-7%) while corporate loans & financing surged ahead (+20%) to RM9.2b. NIM compression of 20bps to 3.2% (as higher yielding loans/financing dissipates) was higher than our expectation of 3bps. On a positive note, asset quality improved by 3.5ppts to 5.5% with credit costs at 0.11% (from 9M17: 1.8%) due to improving economic variables (hence, a writeback of RM71m mostly from PF).

QoQ, earnings improved 42%, again underpinned by falling impairment allowances (-52%) to RM122m as top-line fell 5% to 341.5m dragged by falling Islamic banking income (-10%) to RM265.0m. Loans & financing continued to decelerate, moderating at 1%, dragged by PF and mortgages. NIM continued its downtrend (-24bps to 3.1%) with asset quality stable as GIL maintained at 5.5% with credit costs at 0.7% (vs 2Q18: 1.4%).

To be stringent ahead. Despite the falling loans/financing, we maintain our 3-4% growth for FY18E driven by corporate loans/financing as another RM950m is expected to be disbursed in 4Q18. Going forward into 2019, we believe management will be selective on loans/financing especially from PF and mortgages, mindful of preserving asset quality ahead. Loans/Financing will be driven by corporates as unutilised corporate financing stood at RM7b (as of 3Q18) with management striving for 30%/70% portfolio mix (from the current 25%/75% corporate/retail). NIM compression is expected to persist into 2019 due to: (i) competition for corporate financing, and (ii) decline in higher yielding PF.

Post results, we maintain our FY18E earnings but revised FY19E by +11% to RM598m on account of: (i) lower NIM (by 30bps to 3.1%), (ii) lower credit costs (1.1% to 0.7% as management guided for normalisation of credit costs of 50-60bps), and (iii) slower loans (from 4% to 3.5%)

TP revised to RM1.25 (from RM1.45) as we ascribed a lower FY19E PB/PE of 1.0x/13x (from 1.1x/17.6x). The PB/PE is based on its 5-year mean with a 0.5SD below) to reflect our concerns of challenging loans and potential uptick in deterioration in asset quality with impending slowdown ahead. Reiterate OUTPERFORM as NIM are above its peers coupled with normalization of credit costs.

Risks to our call: (i) higher-than-expected margin squeeze, (ii) lower- than-expected loans & deposits, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 14 Nov 2018