Earnings improved due to divestment gains, as NIM slid despite improving loan. Overseas contribution still resilient. Slight change in FY19E/FY20E (+2% each), thus TP raised to RM20.60, as we roll over our valuations to FY20E. Reiterate MARKET PERFORM call.

In line. 6M19 CNP of RM1,394m is inline accounting for 53%/51% of our/market estimates. An interim DPS of 16.0 sen was declared (in line).

Credit recovery and divestment gains pushed earnings. YoY, 6M19 CNP grew 5.5%, albeit top-line was marginally stable (-0.7%). While NII fell 5.7%, both Islamic Banking income and NOII improved at +9% and +7%, respectively. Stripping of the RM90m gain in its divestment (in Sinchuan Jincheng Consumer Finance Co), NOII would have fallen by 8.1% and CNP by 1.4%. The weak NII is attributed to NIMs falling by 14bps (due to competitive and repricing of deposits despite loans improving 4.8% (vs. domestic system/expectations of <5%). CIR of 43% (vs. industry’s 47%) is above guidance of <42% attributed to anaemic top-line. Its 18% associate BOCD improved moderately by +3% to RM280m contributing 17% of PBT. YoY, asset quality maintained its positive momentum with GIL falling 17bps to 0.8% with credit recovery of 6bps due to writebacks of RM39m.

QoQ, 2Q was challenging with CNP falling 3% to RM687m as top-line fell 9% to RM1,142m. While NII/Islamic banking income improved by 1.2%/1%, NOII fell 31%. There was a writeback of RM57m, which mitigated the fall in CNP. 2Q saw a loan traction of +1.4% (Q1: +0.6%) driven by residential properties (+3%). NIM continued to exhibit pressure falling by another 1bps. Asset quality continued to improve with GIL shedding another 1bps to 0.8% with a credit recovery of 18bps.

Loan traction expected, but NIM might be challenging. As loans saw traction in QoQ, we expect further traction ahead as management guided for positive momentum from a broad-based robust pipeline. While NIM looks to be under pressure, management is confident of NIM target of >2% (or similar to FY18 at 2.1%) driven by improvement in higher yielding assets and its SME book. We are also positive on its NIM as its LDR and excess liquidity are at 80% and 19%, respectively.

Tweak earnings slightly. Although reported earnings is within expectation, we tweak slightly (+1.9%) our FY19E net earnings to RM2.69b, 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 0.10% (from 0.12% previously).

TP raised, but call maintained. Our TP is raised to RM20.60 (from RM20.15) as we roll over our valuation base to FY20E based on a target PBV of 1.7x. Our valuation implies 2.0SD above the 5-year PB mean. We feel this is justifiable given the still robust contribution from BOCD, improving asset quality and downside bias on credit charge ahead. Reiterate MARKET PERFORM as uncertainty still prevails on both the domestic and external fronts.

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 - 27 Feb 2019