INVESTMENT HIGHLIGHTS

• Earnings for 1QFY18 was within ours and consensus’ expectations.

• Net profit growth was supported by NOII and Islamic Banking income expansion but was moderated by higher provisions.

• Loans mix improved with strong growth in its better risk adjusted return loans. Traction for its Alliance One Account product.

• CASA franchise expanded nicely.

• Possible green shoots from its transformation.

• Upgrade to BUY with an unchanged TP of RM4.60, pegging its FY18 BVPS to PB multiple of 1.3x.

Earnings came in as expected. The Group registered a net profit of RM135.0m for 1QFY18, which was within ours and consensus’ expectations. It was 26.1% and 26.8% of full year estimates respectively.

Decent net profit growth from PPOP expansion. Net profit grew +1.9%yoy as it was supported by solid PPOP growth of +7.9%yoy. However, net profit growth was tempered by higher provisions which grew +56.1%yoy mainly from personal financing portfolio. Nevertheless, credit cost was within management’s guidance.

Strong NOII and Islamic Banking income growth. Main contributor to the PPOP growth was the strong NOII and Islamic Banking income growth. These grew +8.1%yoy and +15.8%yoy respectively. NOII growth was supported by growth in client fee based income which rose +2.9%yoy to RM81.8m. Meanwhile, Islamic Banking income came from higher net financing income of +13.7%yoy to RM72.3m.

Improving loan mix. NII growth was decent at +2.5%yoy, where NIM improvement was admirable at +10bps yoy to 2.32%. This was due to better funding cost management where interest expense fell -1.4%yoy to RM259.1m, and improved loan mix. Better risk adjusted return (RAR) loans were 32% of its loans book as it grew +11.3%yoy to RM12.4b. This was partly due to the strong traction of its Alliance One Account. We believe that this is evident that the implementation of its strategy has been effective.

CASA also improved. While deposits fell -1.6%yoy to RM44.2b, its core deposits grew robustly at +7.4%yoy to RM39.2b. There were decline in money market deposits and negotiable instruments. We were more pleased with the expansion of its CASA, at +5.8%yoy to RM15.6b. We believe that this had also contributed to the NIM improvement and expect to mitigate any NIM compression pressures in the coming quarters.

Transformative journey continues. We were pleased to see that its new product, the Alliance One Account had gained some traction. Sales were more than RM300m as at July’17, while the incremental revenue from this was RM0.3m which was faster than the management expected. Also, the Group’s transformation is on-going and on track, including scale up economically, branch transformation and new digital propositions, which we believe are essential to boost its earnings momentum. The management indicated that the total investment for the restructuring is RM90m in FY18, where RM2.2m had been spent. Management expect the bulk of the investments will be in 3QFY18. More importantly, cost savings and new revenue stream of RM9m and RM11m respectively is expected to be gained from this investment. With everything on track, management are maintaining its earlier guidance: (1) mid single digit loans growth; (2) NIM improvement by circa +5bps; (3) CI ratio of less than 52% with transformation; (4) net credit cost of 30-35bps; (5) ROE of circa 9.5% with transformation; and, (6) maintain its dividend policy.

FORECAST

We are maintaining our FY18 forecast.

VALUATION AND RECOMMENDATION

We believe we are seeing some green shoots from the Group’s transformation plan. We were pleased by the traction seen from its Alliance One Account. We were also pleased to see strong Islamic Banking growth and NIM improvements. Overall, we believe that the Group have a bright prospect in FY18 and going into FY19. As such, we are upgrading our call to BUY. We maintain our TP at RM4.60 which is based on pegging its FY18 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 30 Aug 2017