INVESTMENT HIGHLIGHTS

• Strong result but within expectations

• Contributed by solid income growth

• OPEX expanded drastically

• Sturdy domestic loans growth led by mortgage and SMEs

• Asset quality improved

• No change to forecast

• Upgrade to Trading Buy with adjusted TP of RM6.00 (from RM5.70), as we roll over our valuation to FY19

Strong results within expectations. The Group registered a strong net profit growth of +18.1%yoy to RM590.8m. However, this was within ours and consensus' expectations as it came in at 27.1% and 27.4% of respective full year estimates.

Strong income growth main contributor to earnings growth. NII (including Islamic Banking net fund based income) rose +12.9%yoy to RM1.23b due to positive impact from OPR hike in January 2018. NIM expanded +11bps yoy. Besides the OPR hike, NIM improvement was also due to better funding cost management as CASA grew +14%yoy to RM49.7b. Meanwhile, NOII grew +15.8%yoy to RM534.7m mainly due to higher net forex gain and trading & investment income. Nevertheless, there were also one-off gains of RM131m in the quarter.

Lower provisions was also a contributor. Allowance for loan impairment fell -13.5%yoy as credit cost begin to normalise. This could be due to reduction of exposure in the oil & gas sector where it makes up 3.12% of total gross loans, as compared to 3.21% as at 4QFY17. However, while 1QFY18 saw credit cost below guidance of 30bps, management indicated that it might inch up in the coming quarters.

Positive JAWS but OPEX expanded drastically. OPEX grew +13.5%yoy. While this was matched by total income growth of +14.1%yoy, we are concern by rapid rise in OPEX as any pull back in income may drag earnings down. However, we understand that the reason for the higher than expected OPEX growth was early provisioning of certain personnel cost and IT expenses. Discounting these provisioning, OPEX would have rose by +8 to 9%yoy. As such, OPEX may normalise later in the year.

Modest loans growth due to overseas. Group gross loans expanded +4.3%yoy to RM161.2b as it was moderated by overseas' operation and wholesale banking loans decline of -14.2%yoy to RM14.8b and - 1.8%yoy to RM43.6b respectively. However, retail and business banking grew by +11.4%yoy and +8.7%yoy to RM78.5b and RM24.3b respectively. This was lead by mortgage (+16.5yoy to RM48.9b) and SME loans (+9.6%yoy to RM22.4).

Domestic lead asset quality improvement. Group GIL ratio as at 1QFY18 fell -10bps yoy to 2.29%, attributable to improvement in its domestic assets. Domestic assets GIL ratio improved -52bps yoy to 1.64%. Comparing on sequential quarter basis, Group GIL ratio had a slight uptick of +6bps qoq but we could ascribe this to impact of MFRS 9. Day One impact saw GIL ratio increased +15bps.

Not much impact to MFRS 9 implementation. Day One impact of MFRS 9 implementation saw fully loaded CET1 ratio reduction of only -20bps to 13.7%. Other impact included increase of RM1.36 in allowance for impaired loans, regulatory reserves reduction of RM1.12b and decrease of retained earnings by RM123m only.

Committed to 5-year strategy. Recall, after conclusion of IGNITE 2017, the Group has embarked on a new 5-year strategy with three key thrusts, namely Funding the Group Journey, Invest to Win in the medium term and Transform the Organisation. The new strategy is named FIT22. Amongst the target segments are continuation of Affluent and Mass Affluent market, SMEs, Mid Caps and Large Caps. One aspect of FIT22 is its digitization of the Group. As we have previously stated, we opine that this could lead to additional OPEX in the next 2-3 years time as the Group invest on IT infrastructure and talent acquisition amongst others. However, we opine that these investments can be seen as necessary as the Group need to boost its performance going forward.

FORECAST

We are maintaining our forecast.

VALUATION AND RECOMMENDATION

The Group had a solid start to the year. We were pleasantly surprised by the strength of income growth in the quarter. We expect the boost to NIM in 1QFY18 to taper off as the effect of the OPR hike wears out and deposits priced higher. This could bring pressure to income and subsequently PPOP should OPEX growth trajectory remains high. Nevertheless, we expect that OPEX will normalise given that the Group were front loading some of the expenses in 1QFY18. We believe that this good performance will likely be an impetus for investors to revisit the stock. Hence, we are upgrading our call to TRADING BUY (from NEUTRAL) with an adjusted TP of RM6.00 (from RM5.70) as we roll our our valuation to FY19. Our TP is based on pegging its FY19 BVPS to 0.95x which is its 5-year average PBV

Source: MIDF Research - 1 Jun 2018