INVESTMENT HIGHLIGHTS

• Net profit came in within expectations.

• Net profit decline was due to lower income and higher impairments.

• CI ratio improved to 48.9% showing continued benefits from cost initiatives.

• Mortgage and SME loans growth was strong, as was CASA.

• Asset quality continued to be a concern especially from O&G sector.

• No change to forecast.

• Maintain NEUTRAL with an adjusted TP of RM5.65 (from RM5.15), as we roll over valuation to FY18. We peg the stock to PB multiple of 0.98x.

Lower earnings but within expectations. The Group's 1QFY17 net profit was within ours and consensus’ expectations at 25.8% and 25.7% of respective full year estimates. Net profit for 1QFY17 fell -11.4%yoy to RM500.3m. This decline was attributed to lower NII and NOII, coupled by higher impairment.

Islamic Banking moderated income decline. NII fell -4.5%yoy due to margin compression. In addition, NOII fell -2.3%yoy contributed by the decline in fee income from commercial banking and IB related. However, the net income decline was moderated by growth in Islamic Banking which grew +10.2%yoy. This growth came mostly from net Islamic fund based income.

Possibility of impairment trending down but still early days.

Impairment grew +70.2%yoy due to higher individual allowance which went up to RM64.0m from RM8.2m in 1QFY16. The higher impairment was due to an additional impairment from accounts that have been classified as impaired last year. We understand that this was for an oil and gas (O&G) account in Singapore. However, impairment had come down from its ‘peak’ in 4QFY16. Management expect it to be trending down, with credit charge ratio expected to be around 35bps this year, lower than 39bps registered in FY16.

Mortgage and SME contributor to loans growth. Gross loans grew +3.2%yoy to RM154.5b, mainly from the continued growth in mortgages. This loan segment grew +13.5%yoy to RM44.3b and was the highest contributor to its loans book. Meanwhile, SME loans grew +11.9%yoy to RM20.4b

Strong CASA growth despite competitive environment. Customer deposits as at 1QFY17 grew +5.3%yoy to RM165.8b. However, we like the fact that CASA growth was higher at +14.5%yoy to RM43.5b. This resulted in improvement in CASA ratio to 26.2% vs. 25.6% and 24.1% registered as at 4QFY16 and 1QFY17 respectively. We believe that this strong CASA growth had moderated the NIM compression.

Asset quality slowly improving but still elevated. Despite the moderate growth in its loans book, we continue to be concerned about the Group’s asset quality. GIL ratio remained elevated at 2.39%. However, this was an improvement from 4QFY16. Concerns from O&G sector lingered on, whereby 47% of its O&G exposure was on the watchlist, while 8% were impaired. As context, O&G exposure was 3.4% of loans outstanding as at 1QFY17. As we previously mentioned, our concern is that the situation while under control, has yet to normalised as evident by the additional impairment in 1QFY17.

FORECAST

We are maintaining our forecast for now given that the result were within expectations.

VALUATION AND RECOMMENDATION

Despite the lower earnings stemming from and weakness in NII and NOII, there were bright spots in the Group’s 1QFY17 result, chiefly the strong expansion of its CASA franchise. We believe that this will elevate some of the NIM compression pressure. Nevertheless, asset quality remains our biggest concern, albeit it had improved from the high level of 4QFY16. As such, we maintain NEUTRAL on the stock. We are adjusting our TP to RM5.65 (from RM5.15) as we roll over our valuation to FY18. Our valuation is based on pegging 0.98x to its FY18 BVPS, which is the 3-year average PBV.

Source: MIDF Research - 24 May 2017