12M18 earnings exceeded our expectation on account of better-than-expected NIM and lower impairment allowances. TP raised to RM5.80 (based on a target FY19E PBV of 0.95x, 0.5SD below mean, to reflect on uncertainties ahead. Maintained at MARKET PERFORM.

Exceeded expectations. 12M18 CNP of RM2.3b exceeded/match our/market expectations accounting for 109%/104% of full-year estimates. The positive deviation was due to lower-than-expected impairment allowances, better-than-expected NIM. A final DPS of 13.0 sen was declared bringing total DPS and payout ratio to 20.5 sen and 36% as opposed to expectations of 14.0 sen and 31%, respectively.

Lower impairment allowances and better NIM. YoY, CNP grew 18% to RM2.305m on account of: (i) higher top-line (+7%) and lower-thanexpected impairment allowances (-49%) to RM330m. While NOII slumped (-4%), both NII and Islamic Banking improved (4% and 32% respectively). Loans exceeded expectations (5.5% vs guidance and estimation of ~4% vs systems loans of +5.6%). NIMs at 12bps were within guidance/expectations of 10-12bps/10bps. Asset quality improved primarily due to better performance in 4Q with GIL falling 19bps to 2.1% and credit charge falling 11bps to 0.21%. CIR of 49% was in line with guidance and estimate of <50%.

QoQ, CNP declined (-2%) to RM565m owing to moderating top-line (+3%) higher opex (+6%) and higher impairment allowances (+6%) to RM87m. NOII moderated at 13% primarily due to the absence of net gains in financial instruments. Loans grew 3% but as NIMs expanded slowly (+3bps) NII was relatively flat (<1%). Asset quality continued to improve as GIL fell 31bps to 2.1% and credit charge fell 1bps to 0.19%.

Normalization of credit charge with compressing NIM ahead. While FY18 earnings were boosted by lower impairment allowances and widening NIM, management guided for normalization of credit charge and 3-5bps NIM compression going forward. Management guided for high-teens in credit charge for FY19, but we are cautious in that aspect, as uncertainties still prevail. While we are surprised on the guided NIM compression given that its LDR and LTF levels are acceptable at 94% and 79%, respectively, we understand that given prevailing competition for deposits, NIM compression will be unavoidable.

Revised forecasts, Our FY19E earnings are raised +11.7% to RM2.42b, as we input a lower credit charge (0.19% vs 0.36%). Management guided for ROE and CIR target of 10.5% and <49%, respectively. Our assumptions; (i) loans at <5% (from 4% previously), (ii) CIR at 49% (unchanged), (iii) 5-10bps compression (from flat), and (iv) ROE at 10% (from 9%). We introduce our FY20E earnings, where we expect moderate growth due to the prevailing uncertainties.

TP raised to RM5.80 (from RM5.75) based on a FY19E target PBV of 0.95x (with a 0.5SD below mean)) to reflect potential risk from uncertainties ahead. Maintain MARKET PERFORM as potential returns are <10%.

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

Source: Kenanga Research - 28 Feb 2019