1H19 results came in within, so was the first interim net DPS of 8.5 sen. For FY19, the group will continue to increase its sales capacity and scale up new initiatives to accelerate loans growth, preserving margins (NIM at c.2.4% and CIR of <50%) alongside maintaining decent ROE at c.10%. While investments are necessarily, hence the higher expenses, top-line improvement should drive higher efficiency going forward. Maintain MP with an unchanged TP of RM4.40.

Within expectations. A stronger 2Q19 CNP of RM140.5m (+3% QoQ, +14% YoY) was reported, bringing 1H19 CNP to RM276.9m which made up 51%/49% of our/consensus full-year estimates. Note that this is the highest quarterly net profit in the last 16 quarters, which is starting to reflect fruition from its transformation programme. Meanwhile, first interim net DPS of 8.5 sen was declared as expected.

YoY, 1Q19 total income improved by 3%; with strong growth in net interest income (+6%) and Islamic banking income (+10%), negating the slower non-interest income performance (-14%). 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 (+25%, to 39% by SME and new growth from Alliance One Account), with NIM remained solid at 2.44% (+9bps YoY) with loans at +5.2%. This is alongside the recent OPR hike of +2bps, with improved loan mix. With marginally better CIR of 46.8% (-0.2ppts), PBT improved by a wider quantum of 5% at RM367.9m. Coupled with lower ETR of 24.7% (-1.7ppt), core NP grew by 7%. QoQ, while total income remained flat at RM399.2m (-0.5%, with marginal NII improvement of 1% erased by lower FX trading income and wealth management fee), PBT improved by 3% on lower allowances of impairment on loans, advances and financings. With stable ETR of 24.8% (+0.1ppt), CNP improved by 3%.

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) maintain dividend policy of up to 60%. Thus far, 1H19’s NIM (at 2.44%), CIR (at 46.8%) and ROE (at 10.2%) are in line with guidance. Meanwhile, the group typically only declare dividends on the FY 2Q and 4Q. To achieve such targets, 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 is gaining traction, from -0.5% in the past few quarters to +5.2% in terms of YoY growth for the latest quarter. 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 - 30 Nov 2018