INVESTMENT HIGHLIGHTS

• 1HFY18 earnings were within ours and consensus’ expectations.

• Lower earnings due to transformation investment which was anticipated. Normalised earnings grew +3.5%yoy.

• Strong PPOP growth from better income. NIM improvement played a key part.

• Loans mix continues to improve. Continued traction for its Alliance One Account product.

• Credit cost elevated but will normalise.

• MFRS 9 impact not as severe but early days.

• Maintain BUY with an adjusted TP of RM4.65 (from RM4.60) due rollover of valuation to FY19.

Earnings within expectations. The Group's 1HFY18 earnings of RM257.8m was within ours and consensus' expectations. The net profit was 49.9% and 51.2% of respective full year estimates.

Lower earnings due to transformation and was anticipated. We had anticipated lower earnings in 1HFY18. Net profit fell - 2.7%yoy due to investment made for its transformation program. OPEX increased +9.0%yoy on higher personnel cost, which grew +9.0%yoy to RM235.6m. On a normalised basis, net profit for 1HFY18 grew +3.5%yoy to RM274.3m.

Strong PPOP growth. Nevertheless, strong growth in income (+7.9%yoy) compensated for the higher OPEX. Income growth was underpinned by robust NII, NOII and Islamic Banking. NII grew +7.6%yoy due to improved NIM, which increased +12bps yoy to 2.35%. This was underpinned by expansion in better risk adjusted return loans as it grew +11.8%yoy.

Credit cost higher due to remedial program. The other factor for the lower earnings was higher credit cost, where it rose +15bps yoy to 33bps. CA went up by +75.1%yoy to RM52.2m. However, we are not overly concern as this was due to rescheduled and restructured loans in the SME sector. We can also see this in the slight deterioration of asset quality, where GIL ratio were 0.3ppts yoy higher to 1.2%. We believe that the management are taking proactive steps to ensure loans continue performing. We expect the situation to normalise towards tail end of FY18 and in FY19.

Improving loan mix. The Group's Alliance One Account continues to gain traction as it expanded RM264m in 1HFY18. On average, loans grew RM132m per quarter from this product. We understand that the month of November had already matched the quarter average. As a result of this, its mortgage book declined -5.3%yoy to RM16.3b. However, this was a deliberate strategy by the management as mortgage loans are deemed lower risk adjusted return (RAR). The other segment that also has a better RAR loans and saw strong growth was SME (+9.1%yoy to RM9.7b).

CASA improved in tandem. Deposits fell further by -7.5%yoy to RM42.7b (vs. -1.6%yoy to RM44.2b as at 1QFY18). However, we were pleased that this was due to lower more expensive deposits such as money market deposits. Its core deposits grew robustly at +7.3%yoy to RM40.8b, while CASA expanded +4.6%yoy to RM15.9b. We believe that this had also contributed to the NIM improvement. We can expect further expansion of the Group's CASA franchise once its Alliance at Work initiative gains more traction.

Now to focus on scaling up as transformation continues. After the completion of its corporate reorganization, the Group's focus will be on scaling up its two main products going forward, namely Alliance One Account and Alliance at Work. We have seen that the Alliance One Account are gaining further traction. We believe that this will be the main driver for its earnings in near to medium term. Next is to drive the Alliance at Work. The Alliance at Work account is the bundling of product for all of the Group’s business customers but we believe caters more to SMEs, includes on-boarding of its employees and payroll solution. This will provide a steady supply of CASA for the Group and simultaneously give ability for the Group to earn fee income for the service.

The investment is necessary and will normalise. The management indicated previously that the total investment for the restructuring is RM90m in FY18. Management expect the bulk of the investments will be in 3QFY18. More importantly, there will be cost savings and new revenue stream to be gained from this investment.

Initial impact of MFRS 9 not as severe, but still early days. Management guided that the Day One impact to MFRS 9 will be a no more than 25% increase in provisions and for CET1 to be lower by 60bps. Management estimated the impact to book value will be a decrease of 3%. However, this were initial assessment and may change as the Group comes nearer to implementation date in 1 April 2018.

FORECAST

We are maintaining our FY18 forecast. However, we are adjusting our FY19 book value downwards by -3% to take into account the potential impact of MFRS 9.

VALUATION AND RECOMMENDATION

We believe that the Group's transformation program seem to be having the desired positive impact as evident by the strong income growth. We expect that the result of the transformation will be revenue accretive and will be a main driver for earnings. In addition, credit cost will normalise. As such, we are maintaining our BUY call. We are adjusting our TP to RM4.65 (from RM4.60) as we rollover our valuation to FY19. Our TP is based on pegging its FY19 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 4 Dec 2017