Earnings improved due to divestment gains, as NIM moderated. Overseas contribution fell slightly YoY. With earnings within estimation, we maintain both TP and MARKET PERFORM call.

In line. 3M19 CNP of RM707m is in line, accounting for 27%/26% of our/market estimates. No dividend declared as expected as dividends are normally declared in the 2nd and 4th quarters.

Earnings boosted by divestment gains. YoY, 3M18 CNP grew 10.6% albeit top-line moderated +6.0%, with impairment allowances falling 56.8% to RM18.8m. Top-line was driven by a surging NOII (+36.4%) to RM379.7m attributed to net RM72m gain in divestment in a JV (divesting 37% from its 49% stake in Sinchuan Jincheng Consumer Finance Co). Stripping of this gain, NOII growth would have been at +10.6% and CNP would have been relatively flat. Islamic banking income slowed to +7.0% with NII fell 5.7% on account of falling NIM (- 7bps to 1.8% and within guidance) and loans grew +4.0% (vs. banking system loans’ growth of +5.7% and expectations/guidance of 5-6%). CIR continued to improve, dropping by 1ppt to 42% (vs. industry’s 47%). Share of income from its 20% Chinese associate BOCD fell 4.2% to RM146m but contributed 17% to PBT. YoY, asset quality maintained its positive momentum with GIL falling 18bps to 0.81% with credit charge falling 8bps to 0.06%.

QoQ, CNP started FY19 well with CNP improving +12.9% as top-line improved +6.2%, and surging performance from BOCD by +24.4%. Top-line was bolstered by a broad-based rebound as NII, Islamic income and NOII grew at +1.1%, +5.1% and +17.5%, respectively. QoQ, loan lost momentum, moderating at +0.6% (vs. +2.9% in Q1) which seems the trend for HLB but NIM continued to exhibit pressure, falling 3bps to 1.8% due to higher deposits and treasury costs. For Q1, asset quality was mixed with GIL falling to 0.81% but credit charge saw a slight uptick of 3bps to 0.06%.

Overseas likely to face pressure. While loans were disappointing, we expect traction in the coming quarters, coming from residential properties (+8% yoy; +2% QoQ) and transport vehicles (+0.5% YoY; 3% QoQ) and this made up 62% of its loans book. Management maintains its expectation for FY19E loans to grow in tandem with the GDP. While NIM looks to be under pressure, management is confident of NIM target >2% (from its reported 2.1% for FY18) and we expect compression (due to the absence of any further OPR hike) but mitigated by lesser pressure on deposit taking on account of deferment of NSFR. We expect contributions from BOCD to come under pressure with China's economy slowing as 74% of BOCD's loan book is derived from corporate/SME sector.

No change in earnings. As earnings are within expectation, we make no changes to our FY19E earnings of RM2.64b, based on these assumptions; (i) loans at~5% (unchanged), (ii) CIR at 43% (unchanged), (iii) 1bps compression in NIM (unchanged), and (iv) credit charge at 0.12%.

TP and call maintained. Our TP is maintained at RM20.15 based on a blended FY19E PB/PE of 1.7x/15.5x (unchanged). Our valuation implies 2.0SD above the PB 5-year mean. We feel this is justifiable given the still robust contribution from BOCD and downside bias on credit charge ahead. Reiterate our call of MARKET PERFORM as total returns are <5%.

The key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, and (iv) weaker-than expected contribution from BoCD.

Source: Kenanga Research - 29 Nov 2018