INVESTMENT HIGHLIGHTS

• FY17 earnings within ours and consensus’ expectations

• Solid income growth from NII, NOII and Islamic Banking

• NII growth from better NIM and CI still amongst the lowest in industry

• Gross loans moderated but growing in the right segment

• CASA expanded robustly

• Revised our FY18 forecasts upwards by +3.9%

• Second interim dividend of 34 sen. Total dividend for FY17 is 61 sen, 43% payout ratio

• Maintain BUY with a revised TP of RM25.70 (previously RM23.50) as we pegged FY18 BVPS to PBV of 2.4x

Full year earnings within expectations. Full year net profit for the Group came in within ours and consensus' expectations at 102.7% and 103.4% of respective estimates. Solid income expansion was the main driver for the +5.1%yoy earnings growth.

Solid income growth. Total income grew +7.9%yoy which was the result of growth in NII, NOII and Islamic Banking income. These grew +7.2%yoy, +11.3%yoy and +6.1%yoy respectively. Strong NII growth was due to improved NIM. Despite margin pressure, NIM came in +8bps yoy better on efficient cost of fund management. Interest expense fell - 3.5%yoy to RM7.86b.

Continue to grow unit trust. NOII growth was driven by unit trust income which grew +16.5%yoy to RM899.0m. As a result, the Group continue to solidify its market position as the leader in private unit trust sector with a retail market share of 40.9% and NAV of RM81.4b. Meanwhile, fee & commission income grew +2.4%yoy to RM734.4m.

CI remains the lowest in the industry. OPEX was well contained and lower than expected. OPEX increased +6.7%yoy from higher admin & general expenses which rose +13.3%yoy to RM277.8m. Staff cost went up +6.8%yoy to RM1.97b due to salary increment. However, this was compensated by higher productivity. Gross loan per employee and deposit per employee grew +3.8%yoy and +3.6%yoy to RM16.4m and RM17.2m respectively. CI was 31.9%, still the lowest in the industry.

Gross loans growth moderated but remain resilient. FY17 gross loans moderated to +3.6%yoy to RM304.5b from the +7.5%yoy registered as at FY16. The moderation of the loans were due to pull back in overseas loans and selective lending. Domestic gross loans grew +4.6%yoy to RM282.3b while total overseas gross loans declined - 8.1%yoy to RM22.1b. Gross loans growth was mainly attributable to expansion in the mortgages and SME loans segment. Domestic residential mortgages grew +10.0%yoy to RM101.9b, while domestic commercial mortgages grew +4.3%yoy to RM75.7b where the bulk was for SME borrowers. Domestic commercial mortgages from SME sector were RM71.7b and this was +7.7%yoy higher from previous year. In terms of overall housing mortgage, gross loans were +8.4%yoy higher to RM103.7b. Conversely, corporate lending and hire purchase declined -4.9%yoy to RM39.3b and -2.9%yoy to RM48.1b respectively. We understand that this was due to the Group being selective on the profile of its borrowers for this segment.

Asset quality strong as ever. The Group's asset quality remains strong with GIL ratio as at FY17 coming in flat at 0.5%, substantially below industry’s GIL ratio of 1.5%. The GIL in its main segment was also stable with residential properties, transport vehicle and domestic SME GIL ratio at 0.5%, 0.6% and 0.3% respectively. Credit cost was 7bps.

Domestic deposits led growth. Deposits grew +3.0%yoy to RM319.3b which was mainly led by domestic deposits where it grew +3.6%yoy. Meanwhile, core deposits expanded +4.5%yoy to RM269.7b driven by CASA growth. As at FY17, CASA grew +6.6%yoy to RM83.1b while fixed deposits grew +3.6%yoy to RM186.6b.

Neutral impact of MFRS 9. The Group indicated that CA will increase for Day One impact and subsequent quarters. However, the Group has sufficient buffers in terms of retained earnings and regulatory reserves to mitigate the Day One impact. Going forward, the Group believes that its cautious lending and vigilant monitoring practice will ensure asset quality will remain healthy. Therefore, it does not foresee any significant increase in credit cost.

Guidance for FY18 targets. The Group guided its FY18 targets of: 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 5% and vi) Deposit growth of 5%. In addition, the management indicated that loans growth will be driven by residential property in the affordable segment and SME. Loans approved was strong in FY17 for these two segments and will provide the pipeline for FY18. On NIM, the management guided stable to mid-single digit improvement due to the effect of the OPR hike. Overall, we believe that the FY18 targets are achievable. Moreover, we believe that its loans growth target to be conservative due to the strong domestic economic performance in FY17, which will have a lag spill over effect to loans growth. Typically, loans growth will lag GDP result by 1 to 2 quarters.

FORECASTS

We are revising our FY18 forecast upwards by +3.9% to take into account the guidance from the management.

VALUATION AND RECOMMENDATION

The Group continue to generate solid profitability and we foresee that this will continue in FY18. We believe that its loans are growing in the right segment while its asset quality remains healthy as ever. We are also encouraged by its ability to improve NIM. Furthermore, impact from MFRS 9 will be neutral to Group's capital. With no downward shift in the Group's prospects, we maintain our BUY call. The revision to our FY18 earnings forecast and, loans and deposits expectations had led to a +9.3% increase in our FY18 BVPS estimate. As such, we are revising our TP to RM25.70 (from RM23.50). Our TP is based on pegging FY18 BVPS to PBV of 2.4x which is its 5 year historical PB multiple.

Source: MIDF Research - 23 Feb 2018