Although 6M19 set of results was stellar (+23% YoY), it is in line with our/market estimates driven again by strong contribution from Takaful with financing growth as guided above industry. Credit costs were as guided, a testament to its selective asset growth. Forwards earnings maintained with an unchanged TP of RM4.80 but call revised to OUTPERFORM.

In Line. 6M19 CNP of RM398m is in line accounting for 54%/53% of both our/consensus estimates. No dividend declared as expected as dividends are usually declared in 3Q.

YoY, 6M19 CNP (+23%) was driven by strong top-line (+17% to RM1,578m) but mitigated by opex and higher impairment allowances (+13% and +47% respectively to RM833m and RM53m). As usual Takaful income was the main revenue driver (+35%) contributing 34% of top-line. Higher loans at >+7% (within guidance/expectation) with widening NFM (8bps - due to revision of its base financing rate by 13bps in Dec 2018) saw income from investment of depositors’ funds at +13%. Asset quality is a concern as GIL saw a 22bps uptick to 1.2% mostly coming from uptick in consumer and corporate & commercial (7 and 20bps to 0.5% and 0.7% respectively). Not surprisingly, there was a higher credit loss (+6bps to 0.23% vs guidance/expectation of ~+20bps).

QoQ, CNP fell 4% to RM195m as top-line revenue fell 4% to RM774m dragged by weak Takaful income (-13% to RM251m). Income from investment of depositors’ funds was soft, falling 1% as loans growth were marginal (<+1%) with reported NFM compression of 3bps but banking business saw a >+1% uptick growth as income from investment of shareholders’ funds grew 10%, mostly coming from investment of financial assets. 2Q also saw higher credit charge at 0.26% (+6bps).

Moving forward, we understand that 2H will see more aggressiveness in the loan space with its 50/50 split in contribution from HH/PF recalibrated to 60/40 in light of the economic uncertainties. Mitigating NFM compression from the competitive asset pricing will be further build up from CASA and IA as competition from FDs is nullified with NSFR complied. Nevertheless, management maintains its 6-10bps compression or <+2.5%. The rest of its guidance; loans are maintained at 6-7% with no change on credit costs at 20-25bps.

No change in our FY19E/FY20E assumptions; (i) NFM (-6/-3 bps, (ii) financing at <+7%/+8%, (iii) CIR at 55%/53%, and (iv) credit costs at 20/19 bps.. Maintain earnings at RM734m/RM834m.

TP maintained but valuations undemanding. We maintained TP at RM4.80 ascribing an unchanged FY20 Target PBV of 1.5x implying a 0.5SD below mean). We feel this is justified given that the stock has been trading around 0.5SD-1.5SD below mean in the last 12 months on risk concerns from post-restructuring. We do not feel that asset quality is a concern as the banking business have always been prudent and selective in financing growth; hence the lower target ratio from the high single digits and low teens seen in previous years. Valuations are undemanding, upgrade to OUTPERFORM.

Source: Kenanga Research - 29 Aug 2019