]9M18 earnings exceeded our expectations on account of better-than-expected NIM and lower impairment allowances. TP maintained at RM5.75 (based on a blended FY19E PB/PE of 0.89x/10.7x with a 0.5SD below mean to reflect on risks of steep credit charge ahead due to downside pressure on oil prices). Reiterate OUTPERFORM on still attractive valuations

Exceeded expectations. 9M18 CNP of RM1.74b exceeded our/market expectations accounting for 87%/81% of full-year estimates. The positive deviation was due to lower-than-expected impairment allowances, better-than-expected NIM and higher contribution from Islamic banking income. No dividend declared as expected.

Lower impairment allowances and better NIM. YoY, CNP grew 16.8% to RM1.74b on account of: (i) rebound in top-line (+8%) and lower-than-expected impairment allowances (-43%) to RM241.8m. Top- line was boosted by a +26% boost in Islamic banking income (vs. our expectation of +20% YoY. NII improved and NOII rebounded at +5% and 1%, respectively. Loans were within expectations (+4%) with NIM widening by 17bps to 2.2% (vs. expectations of 2bps enhancement) due to: (i) OPR hike in Jan 18, and (ii) redemption of sub-debts in 1H18. Asset quality was mixed; uptick in GIL by 6bps to 2.37% (largely due to restructuring of debt involving conversion of a bond to loan. Excluding the restructuring, GIL is at 2.28%). Credit charge improved by 9bps to 0.15% (vs. expectations of 0.30%) due to recoveries and lower impairment provisions for its O&G exposure from last year.

QoQ, CNP rebounded by +1.5% to RM578.7m as top-line rebounded by +4.2% but uptick in both opex (+3%) and impairment allowances (+7% to RM82m) contained CNP. The quarter saw better performance from NOII improving +29% (largely attributed to gains from forex and securities/derivatives of +25% and +77% respectively to RM189m and RM233m respectively). NII fell 5% as NIM normalised by 6bps to 2.2% (repricing of deposits) although loans improved to +2%. After falling by 13bps in Q2, credit charge rose by 7bps to 0.15%.

Normalization of credit charge and NIM ahead. While FY18E earnings were boosted by lower impairment allowances and widening NIM, we expect normalization of credit charge and NIM going forward. With global oil prices coming under pressure again, we expect risk of impairments to creep in, coming from its O&G exposure. Management guided for 20-25bps of credit charge for FY18E with FY19E expected to incur the same costs. With no further OPR hike expected, management guided for NIM around the 2.2-2.3% (implying 2-12bps enhancement) range with moderation continues into FY19E but should be ~2.2%.

Revised forecasts, our FY18E earnings are revised slightly by +5% with marginal revision for FY19E based on these assumptions; (i) loans at 4%/4.1% (from 3.5%/4.7%), (ii) NIM 10bps enhancement (from flattish)/flattish, (iii) no change in both CIR at <49%, (iv) credit charge of 0.22% (from 0.30%)/0.25% (from 0.28%), and (v) revision of our FY18E Islamic/fee-based income by +13%/-7% to RM1.46b/1.68b.

TP maintained RM5.75 based on a blended FY19E PB/PE of 0.89x/10.7x (with a 0.5SD below mean)) to reflect on risks of steep credit charge ahead due to downside pressure on oil prices. Reiterate OUTPERFORM as valuations are still undemanding.

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

Source: Kenanga Research - 28 Nov 2018