INVESTMENT HIGHLIGHTS

• Full year net profit within expectations. Net profit lifted by lower provisions.

• Strong CASA expansion but no acceleration in gross loans while NIM flat.

• Asset quality improved.

• Final dividend of 10 sen, full year 15 sen.

• Tweaked FY18 earnings and BVPS.

• Maintain NEUTRAL with unchanged TP of RM5.70 (from RM5.22), pegging the stock to PBV of 0.9x on its FY18 BVPS.

Within expectations. The Group posted a FY17 net profit of RM1.95b, which was within ours and consensus’ full year estimates at 100.6% and 96.5% respectively. The +16.0%yoy rise was due to lower provisions.

Lower provisions provided the lift for FY17. Provisions in 4QFY17 fell -34.1%yoy due to one-off impairment on a corporate bond of RM254m in the previous year. This has led to FY17 provisions to come in -25.6%yoy lower. Excluding the one-off impairment, net profit would have grown +4.0%yoy instead.

Recovery in NOII in 4QFY17. PPOP in FY17 recovered to grow +3.2%yoy as opposed to -1.6%yoy decline in 9MFY17, due to a recovery in NOII in 4QFY17 where it grew +50.4%yoy to RM520.2m. The growth was contributed by strong growth in treasury related income. Net forex gain grew to RM124m from RM44m in 4QFY16. Meanwhile, gains and mark-to-market on securities & derivatives rose to RM40m from RM2m registered in the same quarter last year.

Decent net fund based income growth. Net fund based income expanded at a decent +5.3%yoy to RM4.55b. It was driven by Islamic fund based income which grew +18.7%yoy to RM1.03b, while NII grew +2.0%yoy. Main contributor for the growth was active management of funding and liquidity. To illustrate, interest expense fell -4.4%yoy to RM4.38b, while CASA grew +18.8%yoy to RM50.5b. However, despite strong CASA growth, FY17 NIM was flat at 2.18%. This suggests that there were compression in loan yields. Indeed, interest income fell - 1.6%yoy to RM7.8b.

Sluggish loans growth from overseas. Group gross loans growth grew only +3.7%yoy to RM160.1b. However, domestic gross loans growth made up for the decline overseas. Domestic loans growth grew +5.2%yoy to RM144.8b supported by mortgages and SME loans. These expanded +15.8%yoy to RM46.9b and +10.1%yoy to RM22.1b respectively. For its overseas operation, loans contraction was due to several large repayments and impact of stronger ringgit in Singapore.

Asset quality improved due to domestic. Group GIL ratio as at 4QFY17 improved -8bps qoq and -20bps yoy supported by improvement in the Group asset quality for its domestic operations. Domestic GIL ratio fell -50bps to 1.46%. We opine that there were some weakness from the Group's oil and gas exposure in Singapore.

New 5-year strategy. After concluding IGNITE 2017, the Group has embarked on a new 5-year strategy with three key thrusts, namely Funding the Group Journey, Invest to Win in the medium term and Transform the Organisation. The new strategy is named FIT22. Amongst the target segments are continuation of Affluent and Mass Affluent market, SMEs, Mid Caps and Large Caps. One aspect of FIT22 is its digitization of the Group. In our opinion, this could lead to additional OPEX in the next 2-3 years time as the Group invest on IT infrastructure and talent acquisition amongst others.

FY18 target achievable. For FY18, the management is guiding a target of; (1) ROE of 9-10%, (2) Loans growth of 6%, (3) CASA growth of 10%, (4) GIL ratio of less than 2.2%, (5) CI of less than 50%, and (6) positive overseas profit contribution. We believe that these targets are achievable given it is close to the Group's achievement in FY17.

FORECAST

We are tweaking slightly FY18 earnings and BVPS to reflect the guidance given by the management.

VALUATION AND RECOMMENDATION

Although the Group posted solid net profit growth, we note that this was due to lower credit cost. More importantly, NII growth was only decent, while NIM was flat. However, we believe that the strong growth in CASA, mortgages and SME loans provides a good base for the Group's earnings potential. We might revisit its investment case should there be a more pronounced improvement. For now, we are maintaining our NEUTRAL call for the stock with an adjusted TP of RM5.70 (from RM5.22). Our TP is based on pegging its FY18 BVPS to 0.95x which is its 5-year average PBV.

Source: MIDF Research - 28 Feb 2018