INVESTMENT HIGHLIGHTS

• Exceeded our expectations, with strong NII and NOII growth, while cost contained

• NIM dipped in 3QFY17 due to compression in Indonesia but overall improved. Robust gross loans growth

• Slight uptick in GIL ratio but overall asset quality stable due to lower impaired loans in Malaysia

• Strong CASA expansion

• Capital seemingly well buffered for MFRS 9

• Maintaining forecast

• Maintain BUY with revised TP of RM7.80 (from RM7.17) as we peg FY18 BVPS to 1.4x PBV

Slightly above our expectations. The Group ended the year with another strong quarter with 4QFY17 net profit growing +24.1%yoy. As a result, FY17 earnings rose +25.6%yoy. This exceeded our expectations as FY17 net profit came in at 105.7% of our full year estimates. Meanwhile, it was 98.7% of consensus’ FY17 expectation.

Solid income growth...Operating income grew +9.7%yoy due to robust NII expansion and strong NOII growth, especially in 4QFY17. NII rose +8.4%yoy due to loans growth and NIM expansion in 9MFY17. However, these moderated in 4QFY17. Nevertheless, we are not concerned by the moderation as mortgages, enterprise and commercial loans grew strongly. NOII grew +12.8%yoy supported by reversal in forex gains and higher commissions. These increased to RM1.53b and RM1.25b from –RM0.64b and RM0.97b respectively.

…and lower provisions were contributor to earnings growth. Credit cost improved by -5bps yoy on higher recoveries which grew +43.8%yoy to RM516.6m. Possibly, this was mainly from wholesale corporate banking as provisions fell -51.8%yoy to RM505m

Loans growth moderated due to repayments. Gross loans was relatively flat at +0.2%yoy to RM324.2b. We understand that the moderation in gross loans growth (from +7.0%yoy as at 3QFY17) was due to large repayments. Indeed, wholesale banking gross loans (which contributed 34.5% of total loans book) contracted -5.9%yoy to RM110.7b. However, as mentioned, mortgages, enterprise and commercial banking saw robust gross loans growth at +8.1%, +12.8%yoy and +3.1%yoy to RM86.7b, RM8.8b and RM43.0b respectively. Meanwhile, excluding forex flectuations, group gross loans grew +3.1%yoy.

Impaired loans manageable. GIL ratio went up +10bps yoy to 3.39%. This was due to higher impaired loans in Thailand and Singapore which saw an increase of +20.2%yoy to RM2.56b and +62.1%yoy to RM710.6m. We believe that agricultural and oil & gas sector respectively were the main culprit. However, Malaysia and Indoesia's asset quality improved with impaired loans coming in lower at -4.3%yoy to RM3.56b and -6.6%yoy to RM3.88b. In addition, GIL ratio as at 4QFY17 was +10bps qoq better.

Uptrend in deposits growth. Deposits expanded +5.5%yoy to RM357.0b, led by Malaysia where it grew +12.4%yoy. CASA rose +3.4%yoy to RM124.9b, again led by Malaysia and also Singapore. CASA in these two markets recorded growth of +8.7%yoy to RM68.6b and +16.3%yoy to RM16.4b respectively. CAS

Increased impact from MFRS 9 expected by capital seems to be ready. We opine that capital is sufficiently buffered for the implementation of MFRS 9. The Group’s CET1 ratio had been on a rising trend and stood at 12.2% as at 4QFY17, from 12.2% as at 3QFY17. Management guided that it expects a 70-80bps downward impact to CET1, higher than previous guidance of 50bps, due to the new Bank Negara guidelines to regulatory reserve.

FY18 targets achievable. For FY18, management is guiding; (1) ROE of 10.5%, (2) Dividend payout ratio of 40- 60%, (3) total loans growth of +6.0%yoy, (4) credit cost of 0.55-0.60%, (5) CET1 ratio of 12.0% and (6) CI of 50.0%. We believe that the above target is achievable given the stellar performance from the Group thus far. Loans growth may seem to be on the high-side but given that the Group were focusing on improving asset quality in Thailand and Indonesia, it is poise for a recovery. Meanwhile, we expect loans growth to continue to be robust in Malaysia.

FORECAST

We make no change to our forecast.

VALUATION AND RECOMMENDATION

The Group ended the year on a solid note. We were pleased to see income growth to be strong driver for the earnings growth. We believe that this trend will continue, especially as loans growth is expected to accelerate this year. In addition, there will one-off gains from divestment of its stake in several subsidiaries and, expansion in Vietnam and Phillipines to look forward to. Therefore, we reiterate our BUY call with a revised TP of RM7.80 (from 7.17). Our TP is based on pegging its FY18 BVPS to a higher PBV of 1.4x (from 1.3x) which is its 5-year historical average. We believe that a PB multiple at its historical average is fair given that its earnings have recovered and the reduction of risk due to the implementation of MFRS 9.

Source: MIDF Research - 1 Mar 2018