INVESTMENT HIGHLIGHTS

• Earnings within expectations

• Net profit growth driven by lower provision and controlled OPEX

• NIM compression on loans pricing competition

• Asset quality remains good as ever

• Higher than expected interim dividend of 32 sen

• No change to FY18 and FY19 forecasts

• Maintain BUY with unchanged TP of RM27.30 based on pegging FY19 BVPS to 2.4x

Earnings in line with expectations. The Group registered 1HFY18 net profit growth of +8.6yoy that were supported by +12.6%yoy growth in 1QFY18. Overall, 1HFY18 earnings were within ours and consensus’ expectations coming in at 48.4% and 48.8% respective full year estimates. Main driver for the strong earnings growth were lower provisions and controlled OPEX.

Lower provisions and asset quality stable as always. Provisions fell -8.2%yoy to RM86.0m as CA was -23.2%yoy lower to RM91.5m. We opine that the impact of MFRS 9 seems to have normalised. As we come to expect from the Group, asset quality remain stable which contributed to the low credit cost. GIL ratio was 0.5% as at 2QFY18.

OPEX controlled. OPEX marginally improved on a sequential quarter basis where it fell -0.1%qoq in 2QFY18. As such, 1HFY18 OPEX grew +1.6%yoy only due to higher personnel cost. This lead to better CI ratio which improved -0.7ppts yoy to 33.1%.

NOII and Islamic Banking supported income growth. NOII in 1HFY18 grew +4.9%yoy due to solid growth in unit trust income where it grew +9.5%yoy to RM477.6m, contributing 42% to total NOII. Meanwhile, the second highest contributor (33%), fee & commission income grew +3.5%yoy to RM366.2m. Islamic Banking income grew +6.7%yoy. Both these supported NII, as 1HFY18 NII expanded only at a decent +3.1%yoy coming from NIM pressure.

NIM pressure from asset pricing competition. NIM in 2QFY18 fell - 2bps yoy and -9bps qoq due intense competition in loans pricing. We also believe that this could be due to higher cost of fund, as deposit growth (+interest expense increased +9.4%yoy to RM2.15b in 2QFY18 and +7.0%yoy to RM4.14b in 1HFY18.

Loans growth subdued to conservative lending practice. The Group's gross loans expanded +4.1%yoy to RM310.7b driven by the retail segment, more specifically mortgages where it grew +9.0%yoy to RM107.9b. However, we understand that the Group have been very conservative in its lending practice and will not boost loans growth by compromising on its risk assessment and its loans pricing discipline. Hence, we are not surprised that gross loans for the Group grew below industry's loans growth. This may have contributed to the NIM pressure and moderate interest income growth of +5.1%yoy to RM7.92b in 1HFY18.

Balancing between cost of fund and deposits growth. Total deposits grew +4.0%yoy to RM329.9b. Fixed deposits expanded +4.4%yoy to RM191.5b while CASA grew +3.8%yoy to RM84.4b. We believe this partly explains the faster pace rise in interest expense. However, going forward, the management indicated that it will be balancing the deposit growth with the cost of fund to ensure that there will be no negative carry.

Surprised quantum for interim dividend. The management is proposing an interim dividend of 32 sen. This represents a payout ratio of 44.3%. We were pleasantly surprised by this as we have expected an interim dividend of 30 sen, in line with past payout ratio of circa 40% to our 1HFY18 estimate.

On track to reach FY18 targets. Recall, the Group guided its FY18 targets of: i) ROE of 14-15%, ii) Total capital ratio of >13%, iii) GIL ratio < 1%, iv) CI ratio of 33.0-34.0%, v) Loans growth of 5%, and vi) Deposit growth of 5%. The Group is on track to achieve its FY18 target, except for loans growth. The management expects challenging period going forward due to external and domestic uncertainties. Hence, the management are revising loans growth target of 4% to 5%. However, we believe that the Group is focused on the right segment which is mortgages as we believe this will be the main driver for loans growth for the industry.

FORECASTS

We maintain our FY18 and FY19 forecasts for now given the result were in line with our expectation.

VALUATION AND RECOMMENDATION

We continue to like the Group’s ability to maintain its profitability and the higher than expected interim dividend was a pleasant surprise. Although, there are potential headwinds stemming from external uncertainties, we remain optimistic of the Group's ability to sustain its profitability. Moreover, we believe that the Group's retail-centric should stand to benefit in the uplift of consumer sentiment. Therefore, we maintain our BUY call for the stock with unchanged TP of RM27.30. Our TP is based on pegging FY19 BVPS to 2.4x PBV which is its 5-year historical PB multiple.

Source: MIDF Research - 16 Aug 2018