INVESTMENT HIGHLIGHTS

• Net profit for 9MFY17 within expectations

• NII and NOII main contributors to earnings expansion

• NOII growth was from better unit trust and fee & commission income

• NIM improvement from better funding cost management as CASA grew faster than fixed deposit

• Stable asset quality

• No change to FY17 forecast

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

No variance to expectations. The Group reported earnings of RM3.98b in 9MFY17 which was within ours and consensus' expectations. The net profit came in at 74.8% and 75.6% of respective full year estimates. It was a case of an acceleration in earnings growth in 3QFY17 (+13.5%yoy vs. +6.0%yoy in 2QFY17), resulting +7.0%yoy expansion in 9MFY17.

Income continued to contribute to earnings growth. Main contributor to the solid growth was NII and NOII expansion. NOII came in stronger due to the acceleration in 3QFY17 (+26.4%yoy). Overall, 9MFY17 NOII was supported by; (i) growth in unit trust income (+16.2%yoy to RM670.6m) highlighting its strong position in the asset management space, and (ii) higher fee & commission income which grew +4.9%yoy to RM542.8m.

Better funding cost management lead to strong NII growth. NII grew +8.0%yoy in 9MFY17 which was due to better NIM. We believe that NIM improvement came in from better funding cost management as interest expense fell -4.1%yoy to RM5.88b. In turn, we opine that this stemmed from CASA growth outpacing fixed deposit growth. CASA grew +8.9%yoy to RM82.1b vs. FD growth of +4.2%yoy to RM188.0b.

Gross loans growth remained steady. Gross loans grew at a steady +4.5%yoy to RM301.3b. As we expected, the main contributor for the loans growth was from mortgages where it grew +9.0%yoy to RM104.8b. The gross loans growth was moderated by lower hire purchase loans which fell -3.0%yoy to RM51.1b. However, we understand this was deliberate on account of reducing the Group's exposure for this loan segment.

Asset quality remains stable as expected. We continue to like the Group due to its stable and good asset quality. GIL ratio remained stable 0.5%. It was also stable for all major loans segment. Furthermore, credit cost was better by 3bps yoy to 0.08%. A slight concern will be its LLC which fell below 100% level at 98.2%. We believe that credit cost could increase slightly (via higher CA allowance) to ensure LLC remained above 100% without affecting earnings significantly. However, at current level, our concern is only minor.

On track to reach FY17 targets. The Group appears to be on track to reach its FY17 target. Recall, the guided FY17 targets were: 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 4-5% and vi) Deposit growth of 5-6%.

FORECASTS

We make no changes to our FY17 forecast as the results were within our estimate. We also make no changes to our FY18 estimate despite the upcoming FRS 9 as believe that we are sufficiently conservative in our forecast.

VALUATION AND RECOMMENDATION

We continue to like the fact that the Group is not abandoning its prudent lending standard in search for higher loans growth. This stability in asset quality is a major appeal of the Group in our view. We also like the fact that NII continued its expansion which was supported by NIM improvement. A pleasant surprise was the acceleration of NOII growth in 3QFY17. As we are expecting that the Group's profitability is sustainable, we are maintaining our BUY call 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 - 27 Oct 2017