INVESTMENT HIGHLIGHTS

• Earnings for 1HFY17 within expectations

• Net profit growth came from lower provisions rather than operational

• Islamic Banking supported the weakness in NII and NOII

• Mortgage loans growth were strong as was CASA

• Asset quality improving but impairment remained elevated

• No change to forecast

• Dividend of 5 sen per share

• Maintain NEUTRAL with unchanged TP of RM5.20, pegging the stock to PB multiple of 0.9x on its FY18 BVPS

Within expectations. The Group's 1HFY17 net profit of RM1.0b was within ours and consensus' expectations. The earnings came 51.6% and 49.5% of full year estimates respectively.

Net profit growth contributed by lower provisions. Net profit grew +9.4%yoy. However, this growth was contributed by lower impairment of other assets which fell -55.5%yoy to RM111.9m. We were disappointed that this was the main source for the net profit growth as PPOP declined -1.7%yoy. Meanwhile, loans provisions went up +18.0%yoy to RM165.3m due to higher IA and CA allowance in 1QFY17.

Islamic Banking moderated weakness elsewhere. OPEX in 1HFY17 went up +1.9%yoy due to increased personnel and admin & general cost. However, we believe that this was overall well contained. On the other hand, total income was flat. The strong +17.2%yoy growth in Islamic Banking income moderated the flat NII and NOII decline of - 7.9%yoy. The Islamic Banking income expansion was mainly contributed by robust gross financing growth of +12.9%yoy to RM38.3b.

Prudent funding cost management led to improved NIM...as it improved +2bps qoq to 2.19%. Besides, better funding cost management, decent loans growth was also a contributor. Gross loans as at 2QFY17 expanded +3.2%yoy to RM156.6b. This was due to higher mortgages, where purchase of residential and non-residential properties rose +12.8%yoy and +16.7%yoy to RM45.5b and RM16.4b respectively.

Deposit expansion led by strong CASA growth. Customer deposits as at 2QFY17 grew +1.0%yoy to RM165.8b which was supported by strong CASA growth of +13.5%yoy to RM46.2b. Meanwhile, fixed deposits fell -3.1%yoy to RM119.5b. We believe that this may moderate any NIM compression in coming quarters.

Asset quality improving but impairments still elevated. GIL ratio as at 2QFY17 improved -10bps qoq and it was the second consecutive quarter of improvement. However, the levels of impairments was still elevated. We note that the Group was still affected by weakness in the oil and gas industry in Singapore. Impaired loans in Singapore went up +85.6%yoy to RM559.0m, and continues to be a concern.

FORECAST

We are maintaining our forecast for now given that earnings was within expectations.

VALUATION AND RECOMMENDATION

While there were improvements in earnings, we were disappointed that this did not come from its overall operations. However, there were marginal improvements in 2QFY17 PPOP either on a yearly or quarterly basis. As such, we are maintaining our NEUTRAL call for the stock with an unchanged TP of RM5.20. Our TP is based on pegging its FY18 BVPS to 0.9x which is 1 standard deviation below its 5-year average PBV.

Source: MIDF Research - 30 Aug 2017