INVESTMENT HIGHLIGHTS

• Within expectations. Earnings growth driven by lower OPEX and provisions. Asset quality stable

• Disappointing NII due to NIM compression in Indonesia

• However, NOII from gains in CSI sale provided support

• Loans and deposits growth affected by forex. Consider robust if taken on normalised terms

• Impact of MFRS 9 manageable

• Maintaining forecast

• Maintain BUY with adjusted TP of RM7.85 (from RM7.80) as rollover our valuation to FY19

Within expectations. The Group posted 1QFY18 earnings growth of +10.6%yoy. However, this was within expectations as it came in at 22.9% and 28.8% of ours and consensus' expectations respectively. The drivers for the Group's earnings growth were lower OPEX and provisions.

Cost management continued to yield result. OPEX fell - 6.8%yoy improving CI ratio to 49.8% from 52.6% in 1QFY17. Personnel, establishment, marketing and admin & general expenses declined by -2.4%yoy, -16.4%yoy, -12.1%yoy and -5.6%yoy to RM1.25b, RM485m, RM58m and RM352m respectively. Besides the overall cost management efforts, deconsolidation of CIMB Security International (CSI) also resulted in cost reduction. Recall, the Group sold 50% of its stake in CSI to China Galaxy.

Lower loan provisions main contributor to lower provisions.

Loans provisions declined -5.4%yoy to RM401m due to improvements in Consumer and Commercial banking at -52.1%yoy to RM134m and -14.3%yoy to RM108m respectively. Asset quality was also stable with GIL ratio at 3.2%.

Disappointing NII... NII fell -3.5%yoy due to the combination of NIM compression in Indonesia and flattish gross loans growth of +0.5%yoy to RM323.1b. However, the OPR hike in Malaysia had led to a sequential quarter improvement in NIM by +4bps qoq. In addition, we understand that the slower loans growth was due to forex effect as normalised gross loans grew +5.3%yoy with Malaysia especially registering strong growth of +7.9%yoy to RM195.2b. It was mainly contributed by mortgages which expanded +10.7%yoy.

...but moderated by NOII. For 1QFY18, NOII grew +3.8%yoy. This included the gain from the CSI stake sale of RM152m. Discounting one-off gains in 1QFY17 and 1QFY18, NOII would have declined by -8.0%yoy to RM1.14b. However, this was due to unrealised losses from financial assets at FVTPL of RM388.5m.

CASA was also affected by forex. Deposits expanded +2.7%yoy to RM363.4b as at 1QFY18. More notably was CASA growth of only +2.2%yoy to RM127.3b. However, this was also due to forex effect as normalised CASA grew +7.4%yoy, +9.0%yoy and +2.3%yoy in Malaysia, Indonesia and Singapore respectively. In addition, CASA growth was impacted by whittling down of expnsive savings deposits in Thailand.

Impact from MFRS 9 was manageable. As stated previously, we believe that the Group's capital position is sufficiently buffered for the implementation of MFRS 9 where it stood at 12.2% as at 4QFY17. This allowed the Group to absorb the impact of CET1 ratio reducing by -70bps on Day One implementation. Moreover, its CET1 ratio have since recovered to 11.7% as at 1QFY18 and on track to achieve its target of 12% by end FY18.

On track to achieve FY18 targets so far. Recall, the management is targeting the following for FY18; (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%. Besides the dividend payout ratio, the Group seems to be on track to achieve its targets with the exception of loans growth. However, we understand that the management are expecting loans growth to pick up with corporate loans pipeline looking healthy especially in Indonesia. In addition, we expect loans growth to continue to be robust in Malaysia driven by the consumer segment.

FORECAST

We make no change to our forecast.

VALUATION AND RECOMMENDATION

We opine that the Group had a solid start for the year. Notable highlights were the containment of cost and strong NOII. Only disappointment was the NII decline but this was due to the NIM compression in Indonesia. We expect any headwind will come from the competition there. However, we believe that the growth in Malaysia and recovery in Thailand will moderate its impact. Loans growth appears strong and will likely continue in the coming quarters. Hence, we are maintaining our BUY call with an adjusted TP of RM7.85 (from RM7.80) as we roll over our valuation to FY19.

Our TP is based on pegging its FY19 BVPS to a PBV of 1.4x. Although, the share price have suffered lately due to the uncertainty following the installation of a new Government in Malaysia, we believe that this presents an opportunity for investors. We believe that the share price will recover after dust has settled and more certainty on the policies of the new Government.

Source: MIDF Research - 31 May 2018