• Earnings for 1HFY17 within expectations

• NII remains robust from better NIM and solid loans growth

• CASA grew faster than fixed deposit

• Stable asset quality

• Dividend of 27 sen (vs. 26 sen in 1HFY16)

• No change to FY17 forecast

• Maintain BUY with unchanged TP of RM23.30 based on 5 year historical PB multiple of 2.4x

Within expectations. The Group’s 1HFY17 earnings were within expectations coming in at 48.5% and 47.2% of ours and consensus’ estimates respectively. Net profit gained traction in 2QFY17 growing faster at +6.0%yoy (vs. +1.5%yoy in 1QFY17). As a result, 1HFY17 earnings expanded +3.8%yoy.

Earnings expansion from continued strong NII growth, coupled with higher Islamic banking income and lower provisions. This was moderated by higher OPEX, which grew +11.1%yoy. Meanwhile, NOII was relatively flat at -0.7%yoy, underpinned by the +14.2%yoy improvement in 2QFY17.

NII growth from better NIM and gross loans growth. NIM improved +10bps yoy to 2.29% in 1HFY17 due to better funding cost management. Evidently, CASA grew +8.8%yoy to RM81.3b as compared to fixed deposit growth of +3.7%yoy to RM183.5b. However, management is expecting compression in 2HFY17 due to competition, leading to flattish NIM which is in line with our current expectation.

Gross loans growth steady at +5.3%yoy to RM298.5b. Main contributor for the loans growth was from housing loans (+8.8%yoy to RM98.95b) and corporate loans (+8.6%yoy to RM44.6b). We understand that main contributor to mortgage growth was from affordable housing where we believe demand will continue. We also understand that mortgage approval growth came from both in terms of volume and value. We opine that this will give a steady pipeline for loans growth in 2HFY17. Conversely, hire purchase loans fell -2.0%yoy to RM51.3b. However, this was within our expectations given the previous lower demand and more cautious approach to lending for this

segment by the Group. However, with demand and approvals improving, we expect some recovery in 2HFY17.

Slight reduction of -1ppt qoq in CI in 2QFY17. OPEX increased +11.1%yoy in 1HFY17 due to high growth in 1QFY17 (+12.5%yoy). Overall, salaries rose +11.6%yoy to RM1.02b. However, 2QFY17 OPEX grew at lower pace of +9.8%yoy, resulting in lower CI for the quarter. As such CI was steady at 33.8% and still amongst the lowest in the industry.

Stable asset quality despite robust loans growth. In our opinion, one of the key appeal for the Group is its good asset quality. This has not change given GIL ratio remaining stable at 0.5%. It was also stable for all major loans segment.

On track to reach FY17 targets except for loans. Recall, the Group guided its FY17 targets of: i) ROE of 14- 15%, ii) Total capital ratio of >13%, iii) GIL ratio < 1%, iv) CI ratio of 33.0-34.0%, v) Loans growth of 6-7% and vi) Deposit growth of 5-6%. The Group appears to be on track to achieve its FY17 target. Only exception is loans growth, where the annualised growth was +3.1%yoy in 1HFY17. This was due to weakness in its overseas market and hire purchase loans segment. As such, management is revising its loans growth target to +4.0-5.0%. Nevertheless, we optimistic of the prospect of the Group sustaining its earnings growth for this year.

FORECASTS

We make no change to our FY17 and FY18 forecast despite management guiding lower loans growth. This is due to the fact that we believe that NIM for FY17 will be similar to FY16 level, which would compensate for the lower loans growth.

VALUATION AND RECOMMENDATION

We believe that the Group will be able to achieve its target for FY17. In our opinion, loans growth in the residential property segment will be key. Nevertheless, we like the fact that the Group are not sacrificing its prudent lending standard in search of higher loans growth. This stability in asset quality is a major appeal of the Group in our view. With the expectations of sustainable profitability, we maintain BUY for the stock with an unchanged TP of RM23.30. Our TP is based on pegging FY18 PBV to 2.4x which is its 5 year historical PB multiple.

Source: MIDF Research - 26 Jul 2017