• Slightly above expectations as we underestimated the growth of the Group’s Islamic Banking income.

• Earnings expansion was due to solid NII and NOII growth.

• NII growth was due to NIM improvement and robust gross loans growth especially in mortgages in Malaysia.

• Asset quality stable due to lower impairment in Malaysia.

• Capital seemingly well buffered for MFRS9.

• Dividend of 13 sen.

• Tweaking FY17 forecast upwards by +4.7%.

• Optimism on the Group remains but all have been priced in. Maintain NEUTRAL with unchanged TP of RM7.10, based on 1.3x PBV on FY18 BVPS.

Slightly above expectations. The Group recorded 1HFY17 net profit of RM2.28b, which was slightly above our expectations at 56.4% of our full year estimate. Meanwhile, it was within consensus’ at 50.7%. The variance was due to our underestimation of its Islamic Banking income where it came in 61.9% of our forecast.

Earnings growth came from solid income expansion. The main contributor for the +35.3%yoy 1HFY17 earnings growth was the solid NII and NOII expansion. NII growth was underpinned by +8bps yoy NIM improvement and +8.3%yoy gross loans growth. Meanwhile, NOII growth was from forex gains (>100%yoy to RM906.2m), asset management (+26.0%yoy to RM181.6m) and brokerage income (+15.1%yoy to RM195.6m).

Segmentally, Wholesale Banking led the way. Wholesale Banking’s PBT grew +76.9%yoy to RM1.24b from improvement in NII (+11.5%yoy to RM1.86b), NOII (+9.4%yoy to RM1.04b) and lower provisions (-62.0%yoy to RM249m). It was also due to turnaround in Corporate Banking PBT in Indonesia and Thailand. Meanwhile, Consumer Banking was flattish (-0.4%yoy to RM1.20b) and slight expansion in Commercial Banking (+2.9%yoy to RM246m) stemmed from decline in Indonesia (-79.1%yoy) and losses in Thailand (-THB451m) respectively.

Mortgages and term loans led gross loans growth. Gross loans as at 2QFY17 grew +8.3%yoy to RM322.3b, supported by mortgages and term loans, which grew +12.3%yoy to RM84.1b and +5.6%yoy to RM35.7b respectively. Auto loans on the otherhand, contracted -1.5%yoy to RM19.6b due to portfolio rebalancing especially in Indonesia. Commercial Banking and Wholesale Banking loans grew +8.7%yoy to RM42.4b and +7.7%yoy to RM112.2b respectively. We continue to be surprised by the gross loans growth in Malaysia where it grew +10.0%yoy which was mainly contributed by mortgages. However, this was moderated by loans growth in Indonesia (+2.8%yoy, in local currency terms), Thailand (-1.7%yoy) and Singapore (+1.1%yoy).

Asset quality stable but deterioration in main markets except Malaysia. GIL ratio came in at 3.2% but impairments was higher at +10.0%yoy to RM10.4b. This was mainly due to increased impairments in Indonesia, Thailand and Singapore, at +2.8%yoy to RM3.67b, +45.6%yoy to RM2.34b and +69.3%yoy to RM419.9m respectively. Singapore loans book was hit by impairments in the oil and gas sector, while we believe impairments in Thailand was from the commodities sector. Fortunately, Malaysia’s asset quality improved where impairments declined -3.6%yoy to RM3.72b.

Credit cost was lower due to unsual writebacks in 1QFY17. Credit cost for 2QFY17 was +26bps qoq higher due to the writebacks in 1QFY17. However, this normalised in 2QFY17. As a result, 1HFY17 credit cost was only +1bps higher than management’s guidance of 60 to 65bps.

CASA franchise continues to be strong. CASA grew +10.5%yoy to RM124.2b led by Malaysia (+9.6%yoy to RM66.4b), Indonesia (+7.0%yoy to RM30.5b) and Singapore (+43.1%yoy to RM15.6b). However, this was curbed by the decline in Thailand (-12.7%yoy to RM8.9b). Excluding forex impact, CASA expansion in Indonesia was decent at +1.6%yoy, strong in Singapore (+36.9%yoy) and disappointing in Thailand (-21.1%yoy). Overall deposit grew strongly at +9.6%yoy to RM348.9b, which was supported by Consumer Banking as it grew +18.2%yoy to RM164.4b.

Capital seems to be ready for MFRS9 next year. The Group’s CET1, Tier 1 and Total Capital ratio had been on a rising trend. It stood at 11.9%, 13.4% and 16.8% respectively as at 2QFY17, from 10.7%, 12.2% and 15.6% as at 2QFY16 respectively. This far exceeds the minimum requirement of 5.125% for CET1, 6.625% for Tier 1 and 8.625% for Total Capital. We believe that the Group are cushioning for the implementation of MFRS9. While we have yet to be certain on the exact quantum of the impact, we opine that capital is sufficiently buffered at current juncture.

FORECAST

We tweaked our FY17 forecast by +4.7% upwards to reflect the better than expected income from Islamic Banking.

VALUATION AND RECOMMENDATION

We continue to like the Group for its achievements in growing its income especially NII, which was underpinned by its ability to improve NIM and grow its loans book strongly. We also like the fact that expansion in its CASA franchise continue to be robust. However, we are slightly concerned on asset quality in Indonesia and Thailand but we understand the situation is gradually improving. Nevertheless, despite our optimism on the Group’s fundamentals, the share price have appreciated by +39.2% since our upgrade to BUY in 21 April 2016. As such, with limited upside currently, we are maintaining our NEUTRAL call with unchanged TP of RM7.10. Our TP is based on pegging its FY18 BVPS to 1.3x PBV.

Source: MIDF Research - 29 Aug 2017