9MFY19 earnings came within our/market expectations at 78% of full-year estimates on account of lower impairment allowances and improved fee-based income. While loans were above expectations, management guided for a challenging 5% growth target for FY19. NII was dragged by higher NIM compression which is expected to be stable for the final quarter of this year but NOII might be hard pressed to repeat its 1HFY19 performance. Nevertheless, our conservative assumptions as well as TP of RM6.05 are maintained but the call is downgraded to MARKET PERFORM given the stock’s outperformance and its price approaching fair value.

In line. 9MFY19 CNP of RM1.86b came in line with our/market expectations, accounting for 78% of both full-year estimates. No dividend declared as expected.

Driven by Islamic banking and fee-based income. YoY, CNP of RM1,861m (+7%) was supported by improved operating profit (+7%) to RM2,499m as impairment allowances on loans fell 9% to RM239m. Top-line at RM5,260m (moderating by 380bps to 3.7%) was supported by both Islamic banking income (+18%) and NOII (+6%). While improvement in Islamic banking income was supported by lower provisioning, NOII was supported by gains from investment securities (+44% to RM604m). Loans growth was at +5.2% (vs. guidance/estimation of ~+5%) but NII fell (-2.8%) due to falling NIM (- 14bps) impacted by the OPR cut in May 2019 coupled with higher funding costs (with longer tenure) from the OPR hike on Jan 18. Loans were driven by retail (+8%), underpinned by mortgages (+10%) and Unsecured Business (+4%). Domestic loans (+5.1%) outpaced system at +3.9%. Islamic financing contributed 37% of total Group loans/financing. Asset improved as GIL fell 21bps to 2.16% with credit charge falling 3bps to 19bps (vs. guidance/expectation of high teens). CIR improved by 50bps to 48.5% (as guided/expected of ~49%).

QoQ, NIM improved, fee-based income fell. CNP was flat at RM615m as topline fell 2% which was offset by drops in both opex (- 2%) and Impairment allowances (-7%). NII improved +4% but both Islamic banking and NOII fell at 3% and 13%, respectively. The former was due to higher provisioning with the latter due to decline in investment securities (-21%) to RM176m. While loans were marginally flat, the improved NIM (+7bps as FDs were re-priced) contributed to the NII performance. Asset quality remained relatively stable as both GIL and credit charge experienced no significant movement from the preceding quarter.

Target ROE of 10.5% looks challenging. No change in management’s target of FY19E ROE at 10.5% (vs. ours of 9.9%). NOII is unlikely to repeat its 1HFY19 performance (no OPR cut and unlikely for further realised gains for the year) and loans might be muted due to the absence or corporate loans. NIM is expected to hover around 2.13% (implying 10bps compression), given that re-pricing of funding costs is expected to come on-stream by 3Q/4Q. Management expects its loans target (+5% YoY) to be challenging, underpinned by mortgage and SMEs (QoQ moderated by 70bps to +1.7%) and we do not expect aggressive foray into PF (in the Islamic market space given its higher provisioning in 3Q). Nevertheless, while NIM looks likely to stabilise in 4Q, deposit competition might prevail ahead as its LDR is still above the industry average of 93%. Credit charge is expected to be as guided (in high teens) with GIL to improve given RM180m impaired loans under the R&R bracket expected to improve GIL by 11bps by end of FY19.

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 the current accommodative interest rate environment with asset quality expected to be stable given its focus on the retail segment. However, it is approaching fair valuation given the recent surge in share price with soft dividend yield vs. industry average of >4%. Hence, downgrade to MARKET PERFORM.

Source: Kenanga Research - 26 Nov 2019