3M19 set of results came in line with our/consensus expectations on account of better loans, credit recovery and lower opex. TP of RM2.60 and OUTPERFROM call maintained pending a briefing from management later today. In Line. 3M19 CNP of RM138m was within expectations accounting for 25%/26% of our/market estimates. No dividend was declared, as expected.

Loans on target, let down by NIM compression. YoY, earnings fell (- 2%) to RM138m; despite lower opex and writebacks (RM10m vs 1Q19: RM16m) recorded for the quarter. Topline (-1%) saw poor performances from its fund-based (-13%) and Islamic banking income (- 1%) Fee-based of (+15%) was driven by a >100% gain in financial instruments to RM72m. While loans growth (+4.6% driven by mortgages +20%) was within guidance, NII was dragged by falling NIM (-20bps) as funding costs intensifies from higher intake of FDs. CIR of 64% (above guidance of <60% and industry average of 48%) due to weak topline as opex expanded due to its current AFINITY TRANSFORMATION programme. Asset quality was mixed as GIL surged ahead by 78bps (to 3.31% due to uptick from the construction sector; +60bps to 0.9%) while the quarter saw a RM10m credit recovery due to write-back of RM12.2m as credit losses charged for the quarter was mild at RM1.8m.

QoQ, earnings fell 4% despite topline improving +4%, as the quarter saw higher opex (+4%) and higher tax rate (+4ppts to 22%). Topline was dragged by NII (-9%). Loans fell (-1%); dragged by purchase of transport vehicles (-3%) and working capital (-6%) while growth in residential mortgages continued to be resilient (+4%). NIM saw a +14ps uptick likely due to better asset pricing from its 10bps rate hike at end of 4Q18.

Earnings maintained for now pending a management briefing later today.

TP and rating maintained. For now, we maintain our OUTPERFORM call (due to undemanding valuations) and TP of RM2.60 based on a target PBV of 0.5x (implying a 0.5SD below mean) pending further updates from management. The 0.5SD below is to reflect concerns on asset quality and domestic/external headwinds.

Risks to our call are: (i) higher-than-expected-margin squeeze, (ii) lower-than-expected loans/financing growth as well as (iii) worse-than expected-deterioration in asset quality.

Source: Kenanga Research - 31 May 2019