12M18 earnings exceeded expectations as impairment allowances fell as expected. Normalization of credit costs are expected for FY19, which will underpin bottom-line. With uncertainties ahead, we reduce our TP to RM1.15 but OUTPERFORM call maintained due to still attractive valuations.

Outperformed. 12M18 core net profit (CNP) of RM642m exceeded our estimates, accounting for 125%/102% of our/consensus full-year estimates. The positive deviation was due to lower-than-expected impairment allowances.

Underpinned by lower impairment allowances. 12M18 earnings surged 54% underpinned by lower impairment allowances (-81%) to RM116m. The lower impairments were attributed to RM155m in writebacks due to prudent impairment that occurred in 1Q17. Top-line fell 7% as fund-based income fell 9%. Loans at +3% (were below guidance/estimates of 4%/6%) attributed to strong corporate loans (+23%). NIM fell 30bps (within guidance) to 3.1% as higher yielding loans/financing dissipated. Asset quality was mixed as there was an uptick of 120bps in GIL to 5.6% with the lower impairments due to writebacks.

Still bullish. Despite its loans/financing growth being off target, management guided for +6% growth as MBSB rolls out its new businesses such as Corporate & Retail internet banking, Cash Recycling and Trade Finance and reducing its Personal Financing. We are cautious on this target as corporate loans are one of its drivers with economic uncertainties prevailing. Further NIM compression is expected to persist into 2019 due to: (i) competition for corporate financing, and (ii) decline in higher yielding personal financing (PF) but we expect NIM to hover around 3%. Management also guided for a 50bps in credit costs for FY19.

Post results, we raised our FY19E earnings by 4.5% to RM625m on account of lower credit cost (of 50bps vs. 70bps previously). We also introduced our FY20E earnings.

TP revised and Call maintained. We lowered our TP to RM1.15 (from RM1.25) as we ascribed a target PBV of 0.90x (implying a 1SD below mean) to reflect our reservation on its loan growth ahead due to prevailing uncertainties. However, the stock is still undemanding; hence, we maintain OUTPERFORM. Risks to our call: (i) higher-than-expected margin squeeze, (ii) lowerthan-expected loans & deposits, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 1 Mar 2019