INVESTMENT HIGHLIGHTS

• Recap, 1HFY18 earnings fell short of expectations due to higher than expected provisions

• Provisions due to individual account

• NII decline partly due to emphasis on Islamic Banking

• Robust loans growth

• Deposits growth from fixed deposits. Possibility of further NIM compression

• Transition year; Maintain BUY with revised TP of RM2.70 (from RM2.90)

Key take away – potential earnings recovery in FY19? We met with the management yesterday for the post result briefing. Our key take away from this meeting are:

• Earnings 2QFY18 were affected by the higher provisions stemming from two individual accounts.

• The impaired accounts expected to be rectified by FY19.

• Income and loans growth driven by Islamic Banking side.

• Deposits growth from fixed deposits as competition intensifies in preparation of Net Stable Funding Ratio (NSFR) requirements.

Recall, result fell short of expectation due to provisions. The Group's 1HFY18 net profit was 36.5% and 42.6% of ours and consensus’ full year estimates respectively. The variance was due to provisions coming in higher than expected.

Provisions were due to two individual accounts. We understand that the higher provisions were due to two individual accounts in the real estate development and, oil & gas sectors. We were comforted by the fact that it was not a broad base deterioration in asset quality. The loan in the real estate development were classified as impaired due to being R&R, while the oil & gas sector loan were impaired and part of a syndicated loan.

GIL ratio shot up due to these two accounts. GIL ratio was 2.81% as at 2QFY18 vs. 2.54% as at 1QFY18. However, the GIL ratio excluding the R&R accounts would have improved to 2.28% from 2.48% as at 1QFY18.

Resolution of the impaired accounts only next year. The management expects the resolution of the R&R real estate development loan to come in this year or 1QFY19 latest and the oil & gas sector loan in FY19. We opine that this could provide a boost to earnings in FY19 via write backs. For this year, the management is guiding a gross credit cost of 30 to 40bps.

Source: MIDF Research - 4 Sept 2018