3M19 earnings came within our/market expectations on account of lower impairment allowances and tax rate. While loans were above expectations, NII was dragged by higher NIM compression, which is expected to persist this year. Nevertheless, our conservative assumptions are maintained; TP raised to RM6.05 with valuation base rolled into FY20E. MARKET PERFORM maintained.

In line. 3M19 CNP of RM630.2m came in line with our/market expectations accounting for 26%/28% of full-year estimates. No dividend was declared as expected.

Lower impairments mitigated falling NIM. YoY, CNP grew 7% to RM630.2m primarily on the back of lower impairment allowances (-36% to RM73m) as top-line fell by 1.5% to RM1,742m. Top-line was dragged by falling NII and NOII of 5.2% and 15%, respectively, but mitigated by stellar Islamic banking income growing +39%. Despite the soft NII, loans growth was above guidance/expectations of +5%/<+5% at 5.5%. NIM, on the other hand, compressed by 10bps (vs. guidance/estimation of 3-5bps/5-10bps) due to normalization of the Jan 2018 OPR hike and higher funding costs. No further deterioration in asset quality as GIL improved by 17bps to 2.12% while credit costs saw an improvement of 4bps to 0.22%. CIR was within guidance (49%) at 48.6% (vs. industry average of 48%).

Lower opex and tax rate boosting profits. QoQ, CNP rebounded by 11.5%, owing to: (i) lower opex (-3% to RM846m), and (ii) lower tax rate by 4ppt to 23%. Top-line was soft at <1% growth rate (3rd consecutive quarter of easing) as both NII and Islamic banking income fell <2%. However, the quarter saw a slowing but resilient NOII at +7% to RM481m (primarily due to a net RM92m gain in financial instruments (vs. 4Q18: -0.4m). Loans grew moderately at <1% with NIM falling 10bps to 2.1% with slight deterioration in asset quality as shown by 12bps uptick to 2.12% for GIL while credit costs saw an uptick of 6bps to 0.22%.

Maintained target ROE of 10.5%. Management maintained its FY19E ROE target but cautioned on its NIMs expecting a further 5bps compression from the earlier guidance of 3-5bps compression. The recent OPR cut plus competitive funding costs are expected to fuel further downside pressure on NIM. Despite the weak loans QoQ, management expects loans to be on target driven by mortgage and SME albeit management guided for a cautious outlook amidst the prevailing external uncertainties. Fee-based income is expected to improve further ahead, in line with the stable economy while credit charge is expected to be as guided (in high teens).

Slight revision to forecasts. Our FY19E/FY20E earnings are tweaked slightly (-1%/-2%) to RM2.39b/RM2.48b for housekeeping purposes - but we maintain our conservative assumptions:- (i) loans growth of <5%/~5.5% (unchanged), (ii) CIR at 49% (unchanged), (iii) 5-10bps compression (unchanged), (iv) credit charge at 19bps (unchanged), and (v) ROE at 10% (unchanged).

TP raised to RM6.05 (from RM5.80) based on a target 0.92x PBV (implying a 0.5SD below mean valuation) - to reflect potential risk from uncertainties ahead – as we roll over our valuation to FY20E. Maintain MARKET PERFORM as potential returns are at borderline ~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 May 2019