• Net profit for 9MFY17 came within expectations

• Higher recoveries and lower provisions curbed net profit decline

• NII declined but there seem to be momentum in 3QFY17.

• NOII moderate income decline

• Uptick in NIM in 3QFY17 with better funding cost, but at the expense of liquidity

• Loans growth accelerated

• Asset quality continued to improve

• No change to forecast

• Maintain NEUTRAL with unchanged TP of RM4.55

Net profit within expectations. The Group's 9MFY17 net profit was in line with expectations coming in 73.2% and 74.7% of ours and consensus' full year estimates respectively.

Net profit decline curbed by recoveries and lower provisions. The Group's bottom line fell -3.3%yoy to RM988.8m due to total income decline. However, higher recoveries and lower provisions had moderate the net profit contraction. Write back grew +18.4%yoy to RM179.5m. Recoveries was higher by +5.6%yoy to RM469.3m while individual assessment allowance was lower by -83.9%yoy to RM7.1m.

NOII growth moderated NII decline. Total income for 9MFY17 fell -1.2%yoy as NII and Islamic Banking income declined -7.2%yoy and - 3.9%yoy. The decline in NII was due to NIM compression and tepid loans growth throughout 1HFY17. However, there were some momentums in 3QFY17 as NII grew +5.7%qoq. Conversely, NOII grew +8.8%yoy, moderating the income decline. NOII growth was due to higher market sales and fixed income syndication and insurance income. Overall, we understand that this was in line with the Group's focus to grow stable NOII.

Uptick in NIM from better funding cost management... NIM continued to be compressed but there was an uptick in 3QFY17. We believe that this resulted in the NII momentum in 3QFY17. The NIM improvement was due to better funding cost management, where cost of fund fell -9bps yoy to 3.22%. We believe that this came from the - 4.9%yoy lower deposits, in particular fixed deposits.

...at the expense of liquidity. While we like the fact that fixed deposits fell -4.9%yoy to RM68.1m, we were disappointed CASA was relatively flat at RM18.6m. While this had helped with better NIM in 3QFY17, it came at the expense of liquidity especially as gross loans grew +4.4%yoy. Resultantly, unadjusted LDR remains above 100% level at 103%, while adjusted LDR was +7.5ppts yoy higher at 90.3%.

Gross loan growth accelerated. Gross loans accelerated from +0.5%yoy registered as at 2QFY17 to +4.4%yoy to RM90.7b as at 3QFY17. The higher paced loans growth was supported by the two main focus segment SMEs and mortgages. SME loans and mortgages grew +10.8%yoy to RM13.75b and +21.6% to RM20.58b respectively.

Asset quality improvement continues. GIL ratio as at 3QFY17 improved further to 1.54% from 1.81% and 1.64% as at 3QFY16 and 2QFY17 respectively. Improvements mainly came from manufacturing, real estate and household purchase of transport vehicles sector where impaired loans fell -83.7%yoy, -7.8%yoy and -25.9%yoy to RM30.3m, RM473.9m and RM220.9m respectively. Meanwhile, credit cost in 9MFY17 continued to improve to -23bps due to earlier portfolio de-risking, consistent credit underwriting standards and rebalancing strategy.

Top “4” aspiration has yet to translate significantly to revenue and earnings. We understand that the implementations of its strategic initiatives are on track. However, we have yet to see it translate into its revenue and earnings as evidence by the decline in both topline and bottom line. Conversely though, NOII have improved significantly and this could be the Group’s main focus going forward.

FORECAST

No change to our forecast.

VALUATION AND RECOMMENDATION

We have seen NII continue to decline but there were some momentum in 3QFY17. There was an uptick in NIM from cost of fund management by what seem to be a deliberate effort to reduce fixed deposit but this has come at the expense of liquidity. This had resulted in unadjusted LDR to increase to more than 100%. We believe that this will be a constraint for the group to improve NII further. We believe that the Group is still trying to find the right mix to balance to grow NII, loans and deposits, and the initiatives may take time to bear fruit. As such, we maintain our NEUTRAL recommendation. Our TP to RM4.55 is based on pegging the stock to a PB multiple of 0.8x which is 1 standard deviation below its 3 year historical average.

Source: MIDF Research - 27 Feb 2017