INVESTMENT HIGHLIGHTS

• Earnings in 1QFY19 within expectations.

• Lower OPEX; benefit from MSS seen.

• Focus area continue to feed NII.

• NIM under slight pressure.

• Asset quality improved.

• No change to forecast.

• Maintain NEUTRAL with adjusted TP to RM4.10 (from RM3.75) as we roll over our valuation to FY20.

Earnings within expectations. The Group earnings was within ours and consensus’ expectations at 25.5% and 27.0% of respective full year estimates. The net profit growth of +5.9%yoy was supported by the decline in OPEX. 

Immediate benefit from MSS in FY18. OPEX fell -7.3%yoy as personnel related costs fell RM26m and absence of one-off RM20m cost in retail operation losses in 1QFY18. Excluding this one-off cost, 1QFY19 OPEX was -3.8%yoy better. As a result, CI improved -5.7ppts yoy at 50.6%, well below the 55% level the management is guiding. The management expect that the OPEX could be kept at around 1QFY19 level for the rest of the year as improvement in personnel cost will be moderated by investments needed. For example, in the Business Banking segment where OPEX went up +23%yoy to RM21m.

Focus area continue to feed NII. The Group’s strategy to focus on Mid Corp, SME, affluent and mass affluent segments has led to continued stable growth in NII. Including income from Islamic Banking, NII grew +4.7%yoy to RM642m. This is consistent in gross loans growth performance, where it expanded +6.1%yoy, coming from mortgages, and loans from wholesale banking and SMEs. Meanwhile, NOII growth was rather weak with +0.8%yoy to RM372m due to lower trading and investment banking income. The NOII also included oneoff gains from foreclosed properties of RM22m. Discounting this, NOII would have fallen -5.1%yoy.

NIM stable but under pressure. NIM was stable at 2.02% due to portfolio balancing and better deposit rates and mix. However, on sequential quarter, there were -2bps compression as the industry saw some asset pricing competition. For example, retail banking and wholesale banking NIM compressed -14.7bps yoy and -1.5bps yoy respectively. The management are anticipating further pressure on NIM due to potential deposit competition as the industry gear up to comply with NSFR in CY19.

Slower CASA growth may put pressure to NIM. Total deposits grew +6.1%yoy to RM98.6b. However, this was mostly from fixed deposits (FD) which expanded +7.2%yoy to RM77.8b. On the positive side, the FD expansion was led by retail FDs which we believe are priced lower than non-retail FD. Retail FD grew +40.3%yoy to RM41.8b. Meanwhile, CASA growth was +2.5%yoy.

Credit cost slow to normalise. The Group posted minimal total provisions of RM7.0m. Nevertheless, this was mostly from charge on commitments and contingencies. Loans and financing saw a writeback of RM10.4m due to recoveries of RM116.6m. We noted that recoveries were still high as credit cost excluding recoveries was 51bps.

Asset quality improved. We were pleased to note that the Group's GIL ratio was -11bps yoy better due to strong improvement in the retail segment as its GIL ratio went from 1.42% as at 1QFY18 to 1.26% as at 1QFY19. This was despite the Group's strategy to focus on the retail segment. Slight concern was the increase of +2bps yoy on GIL ratio for wholesale and business banking to 2.43% and 2.41% respectively. However, at this point, we do not foresee coming weakness in these segments as yet.

Well within FY19 guidance. Recall that the management had guided for FY19; (1) ROE of at least 8.5%, (2) CI of less than 55%, (3) Dividend payout of circa 40% and (4) fully loaded CET1 of between 9.5% to 11.5%. It seems that the Group are on track to reach these targets and the management will be focusing on building on the income momentum seen in FY18. Meanwhile, we commend the management efforts on managing cost, which was a pleasant surprise. We believe that this will allow the Group to put in the needed investments in a more paced manner. One area of concern is that we have yet to see any result is its significant growth in CASA. We believe this will put additional pressure to NIM which may moderate the impact of the Group achieving better assets yields.

FORECAST

We are maintaining our FY19 and FY20 forecast.

VALUATION AND RECOMMENDATION

We believe that the Group have shown good improvements in terms of maintaining NII momentum and bringing cost down. However, there could be potential headwinds in terms of NIM compression. In addition, credit cost were still slow to normalise in our opinion. Therefore, we maintain our NEUTRAL recommendation for the stock. We adjust our TP to RM4.10 (from RM3.75) as we roll over our valuation to FY20. Our TP is based on pegging FY20 BVPS to PBV of 0.7x which 1 standard deviation below its 5-year historical average.

Source: MIDF Research - 23 Aug 2018