INVESTMENT HIGHLIGHTS

• Core net profit within expectations

• Core earnings grew +6.4%yoy due to acceleration of its income

• NIM improvement a key driver to income growth

• Strategy paid off with continued traction for its Alliance One Account and Allaince@Work product

• Asset quality deteriorate but it was due to legacy portfolio

• Dividend of 6.8 sen

• Maintain BUY with unchanged TP of RM4.69 based on PBV of 1.3x to FY19 BVPS

Core earnings within our expectations. The Group FY18 net profit fell -3.7%yoy due to expenses associated with its transformation. However, this was within our expectations as core earnings, i.e. normalising the transformation cost, came in at 101.2% of our full year estimates. This was a +6.4%yoy growth. Comparatively, it was 106.9% to consensus' estimates.

Income growth accelerated. Full year total income grew +7.0%yoy which was an acceleration from +3.2%yoy registered in FY17. In fact, it was the fastest pace of growth in the past 5 years. This was due to robust NII and NOII expansion. NII (inclusive of Islamic net financing income) grew +5.5%yoy to RM1.19b while NOII rose +11.9%yoy to RM381.8m.

Strategy continues to show result. Main driver for the NII growth was due to +14bps yoy to 2.40% improvement in NIM. While the OPR hike had a contributing factor, this was only +2bps. The remainder was from the Group's strategy to invest and recalibrate to higher RAR loans, which grew +19.3%yoy to RM14.5b. This included the traction from its Alliance One Account (AOA) which stood at RM1.0b as at 4QFY18. Growth in AOA have now compensated the whittling down of its conventional mortgage accounts. Another segment with strong growth was its SME and commercial segment, which expanded 9.4%yoy to RM10.3b. Comparatively, gross loans increased +2.5%yoy to RM40.3b.

Alliance@Work traction led to stable COF. Alliance@Work have on boarded more than 10,000 accounts which had surpassed management's target. This had supported CASA growth with +3.1%yoy to RM16.0b. As such, COF was -1bps better to 2.69%.

Deterioration in asset quality were from legacy portfolio. GIL ration increased to 1.4% from 1.0% as at 4QFY17. This was mainly from impairment in loans related to purchase of non-residential properties. We understand that this was a legacy portfolio and the management does not expect any undue stress to its assets going forward.

Transformation cost lower than expected. OPEX grew +14.8%yoy due to transformation cost. Striping the transformation cost, OPEX would have only risen by +4.0%yoy to RM719.8m. Nevertheless, we understand that the transformation cost was lower with CI ratio coming in at 50.5% vs. guidance of 52%. For FY19, the management does not expect further lumpy expenses from the transformation and expect CI ratio to trend gradually towards 46%. We believe this to be achievable given it was the Group's previous normalised level.

Scaling up initiatives in FY19. The management are targeting to ramp-up its AOA further. It targets monthly disbursement to RM500m by end of FY19, targeting affluent and emerging affluent consumers. We believe that AOA will be the main driver for its earnings in near to medium term. Meanwhile, we believe that its Alliance@Work ensure that COF are maintained at around current level due to higher CASA mix. As for SME, the management targets a loans growth of 20% in this segment. We have a slight reservation in regards to this given the increasing competition in this space. However, should the Group manage to maintain the current run rate, it will still be commendable in our view.

FORECAST

We are maintaining our FY19 forecast for now given that the result were within expectations.

VALUATION AND RECOMMENDATION

We believe that the transformation cost have paid early dividends as evident by the acceleration of the Group's income. We opine that it provides a good base for the Group to accelerate it further when all the transformation will be in place. As a result, we expect the initiatives stemming from the transformation will be a main driver for earnings growth in FY19. Therefore, we are maintaining our BUY call with unchanged TP to RM4.69. Our TP is based on pegging its FY19 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 1 Jun 2018