INVESTMENT HIGHLIGHTS

• Within expectations.

• Net profit growth was due to lower provisions and strong NII expansion.

• Solid gross loans growth and robust CASA increase in major markets.

• Asset quality was dragged by its Singapore operations. However, the weakness is contained.

• Liquidity position well covered.

• Dividend of 23 sen.

• No revision to FY17 and FY18 forecast.

• Maintain BUY with unchanged TP of RM10.30, based on PB multiple of 1.4x.

Net profit came within expectations. For 1HFY17, the Group posted net profit of RM3.36b. This was within ours and consensus' expectations arriving at 46.2% and 47.3% of respective full year estimates.

Earnings growth came from lower provisions... The Group's net profit grew +29.9%yoy. As we had anticipated, the earnings growth was mainly due to lower provisions, given that the Group did a heavy proactive restructuring and rescheduling program in FY16. As such, we noted there were lower collective and individual assessment allowance at -28.0%yoy to RM818.0m and -16.6%yoy to RM844.1m respectively. Meanwhile, total write backs increased +22.6%yoy to RM162.8m.

...and also from higher NII. In addition to lower provisions, NII also had a significant contribution to earnings expansion. NII grew +10.9%yoy as the strong growth trend continued in 2QFY17 where NII grew +13.4%yoy and +0.6%qoq. The robust NII increase was due to NIM improvement (+13bps yoy to 2.41% in 1HFY17) and stable gross loans growth (+6.4%yoy to RM480.1b as at 2QFY17). Better NIM came from better loans pricing.

Major markets saw growth in gross loans. Gross loans rose +6.4%yoy to RM273.8b, +6.6%yoy to RM199.0b and +2.9%yoy to RM7.3b, in Malaysia, International Markets and Investment Banking respectively. The Group's loans book expansion in Malaysia was due to mortgage and surprisingly auto loans. These loan segments grew +7.5%yoy and +8.1%yoy to RM77.6b and RM44.6b respectively. There were also traction in SME loans where it grew +21.3%yoy to RM13.8b. Meanwhile, International Market loans were driven by Singapore and Indonesia where it grew (in local currency terms) +4.9%yoy and +3.2%yoy respectively.

CASA increased faster than overall deposits. The Group's total deposit as at 2QFY17 rose only by +1.2%yoy to RM511.7b which was led by International Markets as it increased +3.8%yoy to RM208.8b. In Malaysia deposits was flattish at -0.3%yoy to RM304.9b. However, CASA growth continued to be robust. CASA grew +10.4%yoy to RM188.2b driven by expansion in Malaysia (+5.2%yoy to RM123.2b) and Singapore (+28.4%yoy to SGD13.4b).

Asset quality a concern due to weakness in Singapore. Although the Group's Singapore operation saw improvements in loans growth and deposits, weakness in asset quality there continued to be a drag to the Group, where total GIL ratio rose +19bps to 2.53% due to higher NPLs. GIL ratio in Singapore as at 2QFY17 increased +91bps yoy to 2.29%. On a sequential quarter basis, it was higher by +61bps qoq. The main weakness stemmed from accounts in the oil and gas sector where there were new impairments and impairments of accounts previously upgraded to performing from impaired status. However, the silver lining was that its exposure in oil and gas sector in Singapore was only 1.24% of its loans book, from the total 3.89% exposure in this sector. Also, there were improvements in asset quality on a sequential quarter basis in Malaysia and Indonesia. GIL ratio went down -1bps qoq and -13bps qoq to 2.12% and 4.42% respectively. We believe that the improvement in asset quality in Malaysia have been on a healthy trend given that GIL ratio fell -11bps yoy.

There were no worries in terms of liquidity. The Group’s liquidity position seems to be well covered. Its LD ratio were 93.8% as at 2QFY17 from 95.7% as at 1QFY17. We believe that this was due to the deposits being robust and also the rebalancing of loans portfolio in Indonesia. More importantly, its Liquidity Coverage Ratio (LCR) was above 100% at 146%, well above the regulatory requirement of 80% for CY2017.

FORECAST

We are maintaining our FY17 and FY18 forecast.

VALUATION AND RECOMMENDATION

We are pleased to see the Group's operation continues to improve, especially with the strong growth in NII. While asset quality remains our concern, it is allayed by the fact that we believe that it is well contained. We believe that with the operation improving further in Indonesia, there is still some potential upside to the stock. As such, we are maintaining our BUY call with unchanged TP of RM10.30, based on PB multiple of 1.4x. Although, the expected total returns is slightly below our threshold of +15%, we are making an exception as in our opinion, the Group's earnings recovery have not been fully priced in. Additionally, a dividend yield of +5.8% should limit any potential downside.

Source: MIDF Research - 5 Sept 2017