INVESTMENT HIGHLIGHTS

• Earnings came in at the upper bound of expectations

• Net profit growth was due double digit NII expansion and lower provisions, but loans growth sluggish

• NIM improvement underpinned by CASA growth

• Asset quality dragged by Singapore but improved overall

• Dividend of 32 sen. Full year 55 sen

• Revision to FY18 forecast by +6.5% upwards

• Maintain BUY with revised TP of RM11.20 (from RM10.30), based on PB multiple of 1.6x

Upper bound of expectations. The Group posted FY17 net profit that was at the upper bound of expectations. Its earnings of RM7.52b were 103.6% and 104.0% of ours and consensus’ full year estimates respectively. The strong +11.5%yoy earnings growth was driven by solid NII growth and lower provisions.

Double digit NII growth. NII grew +10.3%yoy due to the NIM improvement of +9bps yoy to 2.36%, while gross loans growth was sluggish at +1.7%yoy to RM493.8b. NIM improvement was mainly from the growth in CASA where it expanded +5.4%yoy to RM196.4b (normalised +7.2%yoy). CASA in Malaysia, Singapore and Indonesia grew +4.9%yoy to RM127.8b, +16.6%yoy to SGD14.6b and +5.2%yoy to IDR48.4t respectively.

Boost from lower provisions. We noted that CA and IA were lower by -24.0%yoy to RM836.4m and -23.4%yoy to RM1.83b respectively. We believe that this was due to higher provisioning in FY16 stemming from the Group heavy proactive R&R program. In addition, IA write back increased +182%yoy to RM326.1m.

Malaysia loans growth moderated contraction overseas. The sluggish gross loans growth was due to contraction in international segment where it fell -2.9%yoy to RM200.9b. However, Malaysia gross loans grew +5.0%yoy to RM285.5b. Main driver was mortgages (+7.6%yoy to RM80.7b), SME (+19.7%yoy to RM14.9b) and surprisingly auto finance (+5.3%yoy to RM80.7b).

GIL ratio uptick due to Singapore. GIL ratio as at 4QFY17 came in +6bps yoy higher to 2.34% due to some stress in Singapore. GIL ratio in Singapore went up +106bps yoy to 2.36%. The main weakness in Singapore was the retail SME and corporate segment mainly from the oil & gas sector. However, asset improved in Malaysia and Indonesia where the GIL ratio come down by -15bps to 1.91% and -80bps to 3.56% respectively. On a sequential quarter basis, Group GIL ratio came down by -16bps.

Another solid year in FY18 can be expected. For FY18, it seems that the Group may be looking at another solid year. We premised our view on the management's guidance of; (1) NIM expansion of +5bps which will result in continued NII growth, (2) net credit cost of 40-45bps inclusive of MFRS 9 which mean that provisions will not increase significantly from FY17 level and, (3) CI of circa 48% which is an improvement from this year level. In addition, we believe that loans growth will improve with Malaysia remaining steady driven by mortgages, and in Indonesia especially with government projects to support credit expansion.

FORECAST

We are revising our FY18 forecast by +6.5% upwards to take into account the guidance from management.

VALUATION AND RECOMMENDATION

The Group had a strong rebound in terms of its growth trajectory in FY17, driven by double digit NII growth and lower provisions. While loans growth was sluggish, we believe that it will improve in FY18. Also, asset quality seems to improve in general. With the expectation of continued earnings growth in FY18, we are maintaining our BUY recommendation. We are revising our TP to RM11.20 (from RM10.30) as we are according a higher PBV of 1.6x (from 1.4x) due to recovered earnings and reduction risk from MFRS 9 implementation.

Source: MIDF Research - 1 Mar 2018