INVESTMENT HIGHLIGHTS

• FY17 earnings were within expectations

• FY17 growth came from momentum in 4QFY17 income

• NOII growth remains strong, with a gain on disposal of foreclosed properties

• Another quarter of NIM improvement as CASA grew at faster rate than total deposits

• Gross loans steady but asset quality a slight concern

• Dividend of 12.6 sen, bringing total for the year to 17.6 sen. Higher than expectations

• No change to forecast

• Maintain NEUTRAL with revised TP of RM5.55 (from RM4.55)

Earnings within expectations. The Group's FY17 net profit was within ours and consensus’ expectations at 98.1% and 100.1% of respective full year estimates.

Turned to growth due to 4QFY17 income. The Group posted FY17 growth of +1.7%yoy due to strong pick up in 4QFY17, where net profit grew +19.9%yoy. This was due to total income growth of +11.3%yoy in the quarter.

NOII growth remains strong. NOII for FY17 grew +11.5%yoy which limited the NII and Islamic Banking income decline of -4.5%yoy and -0.1%yoy respectively. The NOII growth was due to momentum from sustainable fees (such as Wealth and Bancassurance). There was also a gain on disposal of foreclosed properties of RM108.1m in 4QFY17 which contributed positively.

Another quarter of NIM improvement… Even though there was NIM compression in FY17, there was another quarter of improvement in 4QFY17. NIM improved +14bps yoy to 2.06% to end the year with only a compression of -4bps yoy to 1.98%. We believe that this resulted in the NII momentum in 4QFY17. The NIM improvement was due to better funding cost management, from better deposit mix, and increasing composition of SME loans.

... from higher CASA. CASA grew +6.1%yoy to RM19.9b which was underpinned by retail SME and payroll account. On the other hand, deposit grew +4.1%yoy to RM94.1m as at 4QFY17. As a result CASA ratio improved +0.4ppt yoy to 21.1%.

Gross loan growth steady. Gross loans grew +3.5%yoy to RM91.0b which was supported by the two main focus segment SMEs and mortgages. These segments grew +10%yoy and +21%yoy respectively. However, it is not much of a surprise as these were part of the Group’s targeted segment.

Uptick in GIL ratio raised concern on asset quality. GIL ratio was trending downwards as at 3QFY17 but it had increased as at 4QFY17 to 1.86%. This was due to wholesale segment which was impacted by impairments in the quarter. In addition impaired loans in the mining & quarrying (oil and gas related), and real estate sector remained elevated, whereby it grew +74.1%yoy to RM154.0m and +23.6%yoy to RM707.1m respectively. However, management indicated that loan exposure to oil and gas, and commercial real estate sectors had been reduced to 2% and 9% of total gross loans respectively.

FORECAST

No changes were made to our forecast.

VALUATION AND RECOMMENDATION

The Group’s FY17 performance was driven mostly by NOII. While we understand that this was in line with its strategy, we were disappointed that NII declined. However, there was momentum going into the 4QFY17 and loans grew steadily. Nevertheless, we have yet to see traction in earnings despite the improvement. As such, we maintain our NEUTRAL recommendation. However, we are revising our TP to RM5.55 (from RM4.55) as we revert our PB multiple to its 3 years historical average of 1.0x. We believe that this is fair given the improvement that the Group has shown.

Source: MIDF Research - 1 Jun 2017