INVESTMENT HIGHLIGHTS

• 1QFY19 earnings within expectations

• Strong NII growth from NIM improvement

• Better RAR loans grew strongly

• GIL ratio spiked up but expected to taper

• No change to forecast

• Maintain BUY with adjusted TP of RM4.75 (from RM4.69) as we rollover our valuation to FY20. Our TP is based on pegging FY20 BVPS to PBV of 1.3x

Within expectations. The Group registered 1QFY19 net profit that was within ours and consensus' expectations. It came at 22.9% and 24.3% of respective full year estimates. The +1.0%yoy growth in earnings was due to NII expansion.

Strong NII growth from NIM improvement. NII inclusive of Islamic net financing income grew +8.0%yoy to RM321.3m, supporting net income growth of +3.8%yoy to RM401.1m. The strong NII growth was due to improvement in NIM.

NIM improvement resulted from better asset mix. NIM improved +11bps(yoy) to 2.43%. This was partly due to the impact of the OPR hike in January CY18. However, the OPR hike had also caused cost of fund to increase on a sequential quarter basis (+14bps). The other factor for the NIM improvement was better asset mix.

Better RAR loans grew while lower RAR loans contracted. Better RAR loans grew +21.3%yoy as at 1QFY19 to RM15.0b with strong traction from its Alliance One Account (AOA) which expanded RM1.49b to RM1.58b. Meanwhile, lower RAR loans, which includes mortgages, declined -4.4%yoy to RM25.3b.

GIL ratio spiked but expected to level off. Our only worry for the Group is the rising trend in GIL ratio. As at 2QFY19, GIL ratio went up by +14bps(qoq) and +45bps(yoy) to 1.57%. Nevertheless, it was still lower than industry's GIL ratio of 1.61%. The rise in GIL ratio was due to impairments in non residential mortgages and working capital loans. However, these were fully covered resulting in only +6bps yoy increase in credit cost. We understand that the management expects the GIL ratio will taper off in coming quarters.

More work needed to attract CASA. We note that CASA growth was relatively flat at +0.5%yoy to RM15.7b, suggesting that traction from its Alliance@Work product have slowed somewhat. Customer deposits fell -5.0%yoy to RM42.0b but we are not overly concerned as this was due to contraction of money market and negotiable instruments deposits.

MFRS 9 impact better than expected. Recall, previously the management had guided that the Day One impact to lower capital will be by circa 50bps. However, it was only lower by 20bps. Meanwhile, provisions increased by +22%.

Transformation initiatives progressing well but need to ramp up in certain areas. AOA loan approval was more than RM935m in 1QFY19, showing very good progress. We believe that the AOA growth will be key to driving the Group's earnings growth as its RAR is 3x of standalone mortgage. Other initiatives also progressed well. However, we opine that its Alliance@Work needs to ramp-up further. It had acquired more than 5,700 local employee CASA and 213 new company payroll accounts against target more than 20,000 new local employees and more than 1,000 new company payroll.

FORECAST

We are maintaining our FY19 and FY20 forecasts for now given that the result were within expectations.

VALUATION AND RECOMMENDATION

As we had expected, the result of the transformation continues to support earnings growth as evident by the strong income growth. While more work needs to be done, we believe that the Group continues to be on the right track. As such, we are maintaining our BUY call with an adjusted TP of RM4.75 (from RM4.69) as we rollover our valuation to FY20. Our TP is based on pegging its FY20 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 3 Sept 2018