INVESTMENT HIGHLIGHTS

• Net profit for 9MFY18 was within ours but beat consensus’ expectations

• Lower earnings due to transformation investment which was anticipated. Normalised earnings grew +7.0%yoy

• Robust income growth with NIM improvement a key driver

• Better RAR loans with continued traction for its Alliance One Account product

• Lower credit cost due to write back in 3QFY18

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

Earnings beat consensus' but within our expectations. The Group's 9MFY18 earnings came within our expectation at 70.7% of full year estimate. However, it beat consensus' expectations as it was 77.0% of consensus' forecast.

Robust income growth moderate transformation cost. Net profit for 9MFY18 was -3.6%yoy lower due to transformation cost which inflated OPEX by +13.9%yoy. Transformation investment amounted to RM59.5m. However, this was moderated by robust income growth from NII, NOII and Islamic Banking income, which grew +5.2%yoy, 7.6%yoy and 6.5%yoy respectively. In addition, normalised net profit grew +7.0%yoy.

Transformation initiative showing result. One of the initiatives from the transformation program was recalibrating the Group's assets to higher RAR loans. Growth in this segment had been encouraging, as the loans book had expanded +12.4%yoy to RM13.4b. Part of the driver was the Alliance One Account (AOA) which continued its traction as year-to-date loans approved was more than RM1.5b. This had led to the improvement in NIM and NII. For 9MFY18, NIM was +10bps yoy higher. Management expect that the OPR hike will have a +2.0bps and +5.0bps impact to NIM in FY18 and FY19 respectively.

CASA and structured investment will mitigate potential creep up in COF. CASA grew +4.3%yoy to RM15.9b partly due to its Alliance@Work product which on-boarded SMEs and its workers. In addition to structured investment growth (to RM1.1b from RM0.5b), we opine this will mitigate any upward pressure on COF.

Lower credit cost due to one-off write back. Credit cost for 9MFY18 was -4bps yoy lower due to one-off write back. This came about due to overestimation of corporate accounts with probability of default, and it was realigned in 3QFY18. Discounting this write back, net credit cost was 27.9bps. Both were within guidance of less than 30bps. Meanwhile, asset quality was stable.

Transformation scaling up as continues. While AOA have gained traction and has offset contraction of conventional mortgages since Nov'17, management are targeting to ramp-up further. It targets 3 times monthly disbursement to RM500m by end of FY19. We believe that this will be the main driver for its earnings in near to medium term. Meanwhile, we believe that its Alliance@Work will lead to further NIM improvement with lower COF from higher CASA. The Group is on track to acquire 10,000 employee accounts by Mar'18 and the management are aiming to ramp-up acquisition to 7,000 accounts per month. Other initiatives also include SME and branch transformation.

No change in MFRS 9 assessment and impact not as severe. Management guided that the Day One impact to capital will be by circa 50bps lower.

FORECAST

We are maintaining our FY18 and FY19 forecast for now given that the result were within expectations.

VALUATION AND RECOMMENDATION

Despite the transformation investments driving up CI, we noted that it already start to have a positive impact. This is evident by the incremental income growth. Discounting the transformation effect, 9MFY18 income would have grown +5.6%yoy vs. the +6.0%yoy registered. We expect that the result of the transformation will be a main driver for earnings growth in FY19. In addition, with the profile of its loans book, the OPR hike will benefit the Group the most. 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 - 27 Feb 2018