INVESTMENT HIGHLIGHTS

• Net profit for 9MFY17 was within expectations

• Net profit growth from lower impairment of other assets

• Better NII in 3QFY17 moderated NOII decline. Cost well maintained

• Strong CASA expansion but no acceleration in gross loans

• Asset quality weakness remain but stabilising

• No change to FY17 forecast, but tweaked FY18

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

No surprises. The Group posted 9MFY17 net profit growth of +4.9%yoy to RM1.49b. This was within ours and consensus' expectations at 76.9% and 73.8% of respective full year estimates.

Lower provisions rather than operations contributed to earnings growth. Similar to previous quarters, the net profit growth was mainly due to lower impairment of other assets which fell - 54.6%yoy to RM111.4m. Most of the other assets impairment came in 2QFY17, while there were a write back of RM500,000 in 3QFY17. Meanwhile, PPOP continued to disappoint us as it fell -1.6%yoy and - 1.5%yoy in 9MFY17 and 3QFY17 respectively. This was due to lower NOII by -10.9%yoy, moderating the good effort in containing OPEX.

Better NII in 3QFY17 curbed NOII decline. The NOII contraction was mainly from lower treasury income. However, NII grew stronger in 3QFY17 at +5.1%yoy which supported the 9MFY17 NII growth of +1.4%yoy. This was the result of stabilised NIM of 2.19% in 3QFY17, which stemmed from prudent funding cost management as evident by the -4.5%yoy drop in 9MFY17 interest expense. Islamic Banking income was also contributed by better fund based income.

Strong CASA growth was a contributor to stable NIM. While customer deposits as at 3QFY17 grew by +1.5%yoy only to RM168.5b, CASA grew solidly by +11.9%yoy to RM45.6b. The lacklustre deposit growth was due to the Group consciously exited some of the money market time deposit which fell -7.6%yoy to RM24.4b, contributing to the stable NIM.

No acceleration in gross loans. The Group registered gross loans growth of +3.3%yoy to RM158.0b as at 3QFY17. This was similar to the growth of +3.2%yoy posted as at 2QFY17. Mortgages were leading the gross loans where purchase of residential and non-residential properties rose +12.4%yoy and +14.3%yoy to RM46.9b and RM16.7b respectively.

Slight uptick in GIL ratio but stabilising. GIL ratio as at 3QFY17 went up by +2bps qoq to 2.31%. While there were a slight uptick, it appears to be stabilising at around 2.3% level. However, we believe that this shows that there was still weakness in the Group's asset quality. The weakness that stemmed from its exposure in the oil and gas industry seems to be improving but the pace is a concern in our opinion.

Possible hike in OPR may improve margins. The Group is expecting a possible OPR hike in 2HFY17. Meanwhile, our in-house economics team are expecting an OPR hike much earlier. We believe that this will give support to NIM in FY18. We also expect that the Group's will be able to continue its efforts in containing cost and CI ratio may remain below the 50% level.

FORECAST

We are maintaining our FY17 forecast given that earnings was within expectations. However, we are adjusting our FY18 earnings upwards by +9.2% as we factor in better CI ratio and better NIM.

VALUATION AND RECOMMENDATION

As with the previous quarter, we were disappointed that earnings growth was not contributed by its overall operations. We were pleased by the stable NIM and improved CI ratio but believe that NOII had been lacklustre. This trend may continue in FY18, in which we believe that NIM will improve with the potential OPR hike and OPEX contained. However, this will be moderated by tepid loans growth for the Group and the NOII. 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 - 28 Nov 2017