6M19 earnings came within our/market expectations on account of lower impairment allowances and improved fee-based income. While loans were above expectations, NII was dragged by higher NIM compression, which is expected to be stable in the remaining quarters this year. Nevertheless, our conservative assumptions, TP at RM6.05 and OUTPERFORM recommendation are maintained.

In line. 6M19 CNP of RM1.24b came in line with our/market expectations, accounting for 52% of both full-year estimates. A DPS of 12.5 sen was declared, implying a 40% payout (vs expectations of 35%).

NOII boosted by gains. YoY, CNP of RM1,245m (+8%) was supported by improved operating profit (+6%) to RM1,664m as impairment allowances fell 8% to RM168m and improvement in CIR by 60bps to 48.5%. Top-line at RM3,520m (moderating by 420bps to 3.9%) was supported by both Islamic banking income (+26%) and NOII (+8%). While improvement in Islamic banking income was supported by lower provisioning, NOII was supported by gains from investment securities (>+100% to RM292m). Despite loans at +6.8% (vs guidance/estimation of ~+5%) NII fell (-2.6%) due to falling NIM (-18bps to 2.06%) on higher funding costs (with longer tenure) from the OPR hike on Jan 18. Higher mixed of FDs (with longer tenure) and lower LDR also contributed to NIM compression.Asset improved as GIL fell 18bps to 2.15% with credit charge falling 3bps to 20bps (vs guidance/expectation of high teens).

QoQ, CNP fell 2% to RM615m with top-line soft (+2%) dragged by higher tax rate of 27%. NII was flattish dragged by falling NIM (-5bps) despite loans improving by 70bps to +1.4%. Moderation in both fee and other income dragged NOII (-3.5%) despite a 34% gain in investment securities to RM167m. While credit costs declined another 4bps to 0.18%, Q2 saw slight uptick in GIL (+3bps) to 2.15%.

Maintained target ROE of 10.5%. Management maintained its FY19E ROE of 10.5% (vs ours at 10%) with NOII expected to repeat its performance in 2H19 (mainly from revaluation gains - assuming another OPR cut and other one-offs gains). NIM is expected to hover around 2.13% (implying 10bps compression), given that re-pricing of funding costs are expected to come on-stream by Q3/Q4. Management expects loans to be on target (+5% YoY), driven by mortgage and SME but we do not discount an aggressive foray into PF (in the Islamic market space given its higher margins and lower provisioning. Credit charge is expected to be as guided (in high teens) with GIL to improve given that RM180m of the impaired loans under the R&R bracket and expected to improve GIL by 11bps by end of FY19E.

No revision to forecasts. Our FY19E/FY20E NP are maintained at RM2.4b/RM2.5b and we keep our conservative assumptions for both FYs:- (i) loans growth of <5%/~5.2% (unchanged), (ii) CIR at 49% (unchanged), (iii) 5-10bps compression/+3bps (unchanged), (iv) credit charge at 19bps (unchanged), and (v) ROE at 10% (unchanged).

TP maintained at RM6.05 based on a target 0.92x PBV FY20E (implying a 0.5SD below mean valuation) - to reflect potential risk from uncertainties ahead undermining fee-based income growth. We believe loans target is achievable given that its loans are skewed domestically with asset quality expected to be stable given its focus on retails. Reiterate OUTPERFORM as valuations remain undemanding.

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 - 27 Aug 2019