INVESTMENT HIGHLIGHTS

• Net profit for 1QFY17 was within ours and consensus’ expectations.

• Healthy NII growth and lower provisions contributed to better earnings, which grew +19.3%yoy.

• Robust loans growth coupled with strong CASA expansion.

• Asset quality a concern from the Group’s business portfolio but situation may improve with better outlook expected.

• Solid platform for earnings rebound this year.

• No change to forecast.

• Maintain BUY with adjusted TP of RM10.30 (from RM9.80) due to rolling over valuation to FY18. Valuation is based on pegging BVPS to PB multiple of 1.4x.

Within expectations. The Group posted net profit of RM1.70b for 1QFY17 which was within ours and consensus’ expectations. The net profit was 23.5% and 24.0% of respective full year estimates.

NII and lower provisions contributed to earnings growth. Net profit grew +19.3%yoy due to robust growth in NII (+8.5%yoy) and lower provisions (-38.2%yoy). Higher NII arose from improved NIM (+9bps yoy) and strong loans growth.

Loans growth came from all home markets. Gross loans expanded +10.1%yoy to RM486.1b mainly driven by mortgages and working capital loans. These segments grew +8.9%yoy to RM99.3b and +5.4%yoy to RM154.8b respectively. In terms of local currencies, gross loans also showed robust increase from the Group’s home markets. Gross loans in Malaysia, Singapore and Indonesia grew +7.2%yoy, +6.4%yoy and +7.0%yoy to RM270.7b, SGD39.1b and IDR122.6t respectively. These were both from Community Financial Services and Global Banking divisions.

NIM improvement from CASA growth acceleration. CASA growth accelerated to +16.3%yoy to RM181.7b, vs. +10.8%yoy posted as at 4QFY16. This resulted in CASA ratio improving to 35.4% from 31.8% as at 1QFY16. In terms of local currency, CASA grew +7.5%yoy to RM124.4b, +37.2%yoy to SGD12.9b and +1.9%yoy to IDR43.7t in Malaysia, Singapore and Indonesia respectively. In addition, we were pleased to see lower fixed deposits which fell -4.5%yoy to RM279.4b. As a result, total deposits expanded +4.5%yoy to RM513.4b. With this, we expect the Group to be able to maintain NIM at around this level or manage any compression pressure should it exhibit.

Provisions continue downtrend. As we expected, provisions came in lower and it appear to continue its downtrend as it fell for the second consecutive quarter. This was due to lower collective allowance which fell - 50.1%yoy to RM386.9m. This was the earnings booster as PPOP was slightly disappointing, as it came in flat (- 0.8%yoy) due to lower NOII and higher OPEX.

Asset quality a concern but mainly on the business portfolio. Asset quality seemed stable for main consumer portfolio in home markets except mortgages in Indonesia, whereby GIL ratio had risen steadily since 1QFY16 (+86bps yoy to 1.76%). For the Group’s business portfolio, Singapore saw GIL ratio increasing in SME, Business Banking and Corporate Banking segment. Business Banking appears to be the main concern given all home markets experienced a rise in GIL ratio, with +57bps qoq to 12.49%, +24bps qoq to 2.66% and +19bps qoq to 1.96% in Malaysia, Singapore and Indonesia respectively. Nevertheless, the management indicated that it is actively managing the situation. Meanwhile, situation stemming from the oil and gas sector continues to linger with 11% of the segment’s portfolio were impaired vs. 8% as at 4QFY16. However, the Group’s exposure in this sector had decreased to 4.06% from 4.35% as at last quarter.

Outlook improving. Despite the asset quality issues, management believe that the industry outlook is improving especially given the better than expected GDP performance in Malaysia and Singapore. The management noted that there were (1) positive signs of a pick-up in industry growth in Malaysia led by business loan demand with asset quality remains stable; (2) improved loan growth and stable NIM with the potential for slight improvement in Singapore; (3) better investment climate in Indonesia, in addition to the increased spending in infrastructure.

FORECAST

No change to our FY17 and FY18 forecast.

VALUATION AND RECOMMENDATION

The improvements in income and provisions were as we expected. With strong loans growth, robust CASA expansion and steady NIM improvement, we believe it provides a good platform for the Group to continue on its trajectory for a rebound this year. Although asset quality remains a concern, we believe that the situation should improve given the improving economic outlook and stable commodity prices. We opine that this could provide a potential upside surprise. Hence, we continue to be cautiously optimistic on the Group and maintain our BUY call. We are adjusting our TP to RM10.30 (from RM9.80) as we rollover our valuation to FY18. Valuation is based on pegging our BVPS to PB multiple of 1.4x.

Source: MIDF Research - 26 May 2017