9M19 results are in line. Earnings driven by strong NIMs and still benign credit costs. Raised TP to RM4.45, as we roll over valuation base year to FY20E and call revised up to OUTPERFORM on undemanding valuations.

Within expectations. 9M19 CNP of RM426m is in line, accounting for 78%/76% of our/market estimates. No dividend declared as expected.

YoY, 9M19 top-line improved by 4% on the back of higher NII (+9%) and Islamic Banking income (+13%), mitigated by weak NOII (-17%). Supporting the strong fund-based income, loans improved +6% (vs system’s +5.6%) on higher better-risk adjusted return (RAR) loans (+27%) with NIM enhanced further by 20bps to 2.5%. Asset quality deteriorated YoY, as GIL saw uptick of 10bps to 1.3%, with credit charge at 0.22% (+3bps uptick vs guidance of <+12bps). Costs were well contained with CIR falling 3bps to 47%.

QoQ, CNP improved by +6% to RM150m as top-line improved +5% due to broad-based growth, NII, Islamic Banking and NOII at 3%. 7% and 7%, respectively. Loans moderated at +1.1% (vs 2Q at +1.2%) Asset quality was mixed with GIL falling by 10bps but credit charge surged by 10bps to 0.32%.

Transformation in progress as loans growth was below guidance/estimation (>10%/7%). We are positive on the growth of its better adjusted RAR, which help to support NIM. With benign credit costs, the improving NIMs will support the moderating loans.

No change in earnings. As results were in line, we made no changes to our FY19E/FY20E earnings of RM541m/564m.

TP and call raised. We raised our TP to RM4.45 as we roll over the valuation base to FY20E; 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 based on a target PBV of 1.15x (implying a 0.5SD below its 5-year mean to reflect the uncertainties ahead. As valuations are undemanding, we upgrade to

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

Source: Kenanga Research - 1 Mar 2019