INVESTMENT HIGHLIGHTS

• Normalised net profit within our expectations

• Income growth was robust from better NII supported by loans growth and NIM improvement

• Excluding one-off items, OPEX was well contained

• Credit cost normalising. Another quarter of asset quality improvement

• Continue to build income momentum in FY19

• Revised FY19 forecast downwards by -8.4%

• Out of the FBM KLCI index.

Expect further pressure on the stock. Downgrade to NEUTRAL with revised TP to RM3.75 (from RM4.30) Normalised net profit within expectations. The Group registered a decline of -14.5%yoy for its FY18 net profit. However, this was inclusive of the one-off OPEX relating to MSS cost and retail credit card operational losses. Discounting this cost, earnings would have declined -2.7%yoy to RM1.29b due to the high recovery in FY17. This normalised net profit was within our full year estimate at 99.2%.

Robust income growth. Total income grew +5.7%yoy attributable to NII, Islamic banking income and insurance business income. NII (inclusive Islamic bet funding income) grew a robust +8.4%yoy to RM2.48b due to +2bps yoy improvement in NIM and +5.9%yoy growth to RM96.3b in gross loans. This was the first time in the past few years that the Group managed to grow its gross loans faster than industry. Main drivers for the gross loans growth were mortgages (+21%yoy) and business banking (+30%yoy). These were funded by deposit growth of +2%yoy to RM95.8b whereby CASA grew +3%yoy to RM20.4b. Meanwhile, net income from insurance business expanded +21.2%yoy to RM465.1m.

Excluding one-off, OPEX well contained. On the surface, OPEX rose +12.0%yoy. However, this was due to investments relating to strengthening its business units such as Business Banking division and MSS cost. Excluding these one-off expenses, OPEX only grew by +3%yoy to RM2.23b.

Credit cost normalising. Recoveries are waning as the Group posted provisions of RM15.7m as compared to net recoveries of RM195.9m in FY17. This was another reason for the net profit decline. However, we consider this to be positive as the Group will have to rely on its operational excellence rather than boosting its earnings through recoveries going forward.

Another sequential quarter of improvement in asset quality. It appears that asset quality is on an improving trend. GIL ratio was -7bps qoq better to 1.7% from both retail and wholesale banking. This was the second consecutive quarter of quarter-on-quarter improvement. Meanwhile, in a sequential year basis, it was better by - 16bps. Retail and wholesale banking asset quality improved by -8bps yoy and -17bps yoy to 1.25% and 2.29% respectively.

Continue to build income momentum in FY19. For FY19, the management will be focusing on building on the income momentum seen in FY18. Its priorities will be to grow income in top 4 products & segments, achieve better assets yields and grow CASA. Meanwhile, it will also be managing cost and pacing its investments to achieve a CI ratio of 55%.

FORECAST

We are revising downwards our FY19 forecast -8.4%.

VALUATION AND RECOMMENDATION

We believe that the Group is on the right track. Investments made and cost inccured in FY18 have slowly translated to better income. We also like the fact that credit cost is normalising despite its impact to earnings. We expect better momentum in income growth in FY19, and coupled with lower cost, earnings are set to recover. However, the stock will no longer be a component stock in the FBM KLCI, effective 15 June, according FTSE’s first half review of the index announced yesterday. We believe that this will likely cause pressure on its share price in the near term. We opine that this warrants a valuation discount. Therefore, we are revising our TP to RM3.75 (from RM4.30) as we reduce the PBV pegged from 0.8x to 0.7x which 1 standard deviation below its 5-year historical average. As such, we are downgrading our call to NEUTRAL (from TRADING BUY). Nevertheless, we expect to revisit the stock after any short terms headwinds to its share price are resolved.

Source: MIDF Research - 1 Jun 2018