INVESTMENT HIGHLIGHTS

• Net profit below expectations due to provisions

• Otherwise decent result with NII growing robustly

• NIM improved and loans growth decent

• Improvement in asset quality

• Fixed deposit growth outpacing CASA growth

• Revised FY18 and FY19 forecast downwards by -7.7% and -4.1%.

• Maintain NEUTRAL with adjusted TP of RM4.30 (from RM4.40)

Below expectations. The Group's 9MFY18 net profit of RM878.7m did not meet ours and consensus' expectations. It was 62.4% and 66.4% of respective full year estimates. The variance was due to provisions in 3QFY18 instead of previous trend of write backs.

Net profit declined due to provisions. The Group posted 9MFY18 net profit decline of -11.1%yoy due to provisions of RM32.9m. The provisions came in the 3QFY17 which amounted to RM80.9m. In turn, this was due to an account which became non-performing amounting to circa RM50m. However, we understand that the loan have been fully repaid in January CY18 and will result in a write back.

Otherwise, decent result. NII (inclusive of Islamic Banking) grew +8.8%yoy to RM1.84b, contributed by NIM expansion of +2bps yoy to 1.98%. The NIM improved through portfolio rebalancing and funding mix. Asset yield improved circa 0.7bps, while yield improved circa 1.1bps through funding mix. Meanwhile, NOII was flat at RM1.07b.

OPEX increase expected; due to investment. OPEX rose at faster pace at +7.3%yoy (vs. +5.3%yoy to RM1.12b in 1HFY18). This was due to higher personnel and compliance cost. Combined, both added RM104.2m to 9MFY17 OPEX of RM1.57b. However, we are not too concern by this uptick in OPEX as it was due to investment relating to building the capability of its Business Banking division.

MSS cost will increase OPEX but savings later. Also, we could expect a further increase in personnel cost from its MSS program, where a total of 1,123 applications were approved, representing 12% of the Group’s permanent workforce. The payout for the MSS is estimated at RM128m which will be accounted for in 4QFY18. However, we understand that the savings is expected to be RM80m per year.

Loans growth good in targeted segment. Gross loans grew at decent a +4.4%yoy to RM94.7b which is slightly faster than banking system growth. Main contributor was its target segment of mortgage (+22.2%yoy to RM25.5b) and SME loans (+14.5%yoy to RM15.8b).

Sequential quarter improvement in asset quality. While GIL ratio as at 3QFY18 was still higher on a sequential year basis (vs. 1.54% as at 3QFY17), there were still improvement on a sequential quarter basis. GIL ratio improved by -11bps qoq to 1.77% from both retail and wholesale banking.

Fixed deposit growth still outpacing CASA growth. We were disappointed that fixed deposits growth continued to outpace that of CASA. Fixed deposits grew +17.7%yoy to RM79.9b driven by retail segment which rose +32.2%yoy to RM35.7b. CASA expanded +7.0%yoy to RM20.0b. We believe that this could be a hindering NIM to expand further.

ROE target still seems ambitious. Previously, management guided an ROE of circa 10% within 2 years time and circa 7% for FY18. We believe that the 10% ROE target to be ambitious taking into account the mix result especially the high investment that was incurred for strengthening of its Business Banking and yield on deposits.

FORECAST

We are revising downwards our FY18 and FY19 forecast downwards by -7.7% and -4.1%.

VALUATION AND RECOMMENDATION

We are encouraged by the pockets of improvement we have observed in the 9MFY18 result. We like the fact that NII grew robustly and NIM expanded decently. However, we believe that the growth in the fixed deposit are hindering a better NIM improvement. We also like the fact that credit cost is normalising despite its impact to earnings. While we opine that there are encouraging signs, we view that it is not compelling enough at this juncture. We could potentially revisit its investment case in CY18 but for now we maintain our NEUTRAL recommendation with adjusted TP to RM4.30 (from RM4.40), based on PBV of 0.8x, pegged to FY19 BVPS.

Source: MIDF Research - 1 Mar 2018