12M19 results are in line, driven by higher NIM from higher RAR (risk adjusted returns) loans mix. TP lowered to RM4.25, given the risks ahead coming from competitive asset pricing and higher provisioning given the higher intake of PFs and SMEs moving forward.

In Line. 12M19 CNP of RM538m is in line with our estimation accounting for 99%/94% of our/market estimates. A final DPS of 8.2 sen was declared making its full-year DPS of 16.7% (in line) maintaining its dividend payout of 48%.

Better RAR loans translating higher NIM despite loans off-target. YoY, 12M19 improved +9% to on the back of an improving topline (+3%) to RM1,622m and a lower tax rate of 24% (vs. 12M18: 28%) mitigated by higher impairment allowances of RM131m (+41%). Decent topline was dragged by falling NOII (-23%) but both Islamic and NII improved at +10% and +13% respectively. Strong NII was supported by better NIM (+20bps) and loans of +6% (vs guidance/estimation of 10%/7% and system loans of 4.9%). The improvement in NIM due to asset pricing outpacing COF (26bps vs. 20bps); coming from i) full year OPR hike impact (13bps) and ii) better RAR loans mix (11bps). The higher NIM was enhanced by higher RAR loans (+27% vs. falling lower RAR loans at 6%). The RAR space was driven by SME & Commercial (+1.3%) to RM11.5b while Alliance One Account improved +2.2% to RM3.2b. Asset quality was mix with GIL falling 30bps to 1.1% while credit costs saw 8bps uptick to 0.32% (within guidance/estimation. CIR of 48% was within guidance/estimation (vs. industry’s 48%).

Competitive asset pricing pushes loans growth. QoQ, was a disappointment as CNP fell 25% to RM112m due to i) falling topline (- 4%) to RM403m and ii) higher impairment allowances to RM40m (+24%). Topline plunge was dragged by NOII falling 18% to RM56m. Loans grew >3% but translated to falling NII (-0.6%) as NIM fell 5bps due to competitive asset pricing. Asset quality was mixed with GIL falling by 20bps, but credit charge surged by 7bps to 0.39%.

FY20 target doable. Management set a target ROE of >10% for FY20E, driven by i) loans ~+7%, ii) 5-10bps compression in NIM, iii) CIR of 48% and (iv) credit cost of ~35bps. Loans will be driven by its RAR loans namely i) Alliance One Account (AOA), ii) PF and (iii) SMEs. Mitigating NIM compression will be the drive for higher CASA through targeting 1,800 new payroll companies (vs. FY19: 1,350 companies). While we believe these targets are doable, risks of falling NIMs and higher credit costs are a concern with competitive asset pricing and higher provisioning given the higher intake of PFs and SMEs.

Earnings revised upwards. Given our FY20E assumptions of i) loans at +7% (from +9), ii) credit costs at 35bps (from 23bps ), iii) NIM (at - 5bps vs. -1bps) and CIR of 48 (from 50%) we raised slightly our FY20E by ~2% to RM576bm (giving a potential ROE of <10%) and introduce our FY21E earnings at RM629m where we expect loan traction to continue with improved NIM.

TP lowered but call maintained. We lowered our TP to RM4.25 (from RM4.45) based on a target PBV of 1.1x (implying a 0.5SD below its 5- year mean) to reflect risks of higher provisioning from its SME and PF book with uncertainties prevailing. Valuations are still attractive. Coupled with the decent dividend yield of 4.7%, the potential total returns are expected to exceed 15%. Hence, we maintained our call at 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 - 30 May 2019