INVESTMENT HIGHLIGHTS

• Aims to grow SME loans book to 20% contribution by 2020

• Fast approvals seen as key to winning more businesses

• Good asset yield from SMEs

• No change to forecast

• Maintain TRADING BUY with unchanged TP of RM6.00

Briefing on business banking. We attended a briefing held by the Group on its Business Banking segment last Friday. The key take away from the meeting was that SMEs, in particular the small business segment, is aimed to be solid contributor to the Group's loans portfolio.

Still room to grow in the SME segment. The Group is targeting for SME to contribute 20% to its loans book by 2020 from the current 16%. It also targets to jump one place to become the top 3 bank of choice for SMEs. We believe that the interest in SMEs from banks is due to the segment's growth outperforming GDP. For example, SME grew +5.2%yoy vs. Malaysian GDP growth of +4.2%yoy in 2016.

Focus is on the small businesses. We noted that the Group will be targeting the small business segment in the SME sector. We believe that this provide the optimum size to risk ratio. Small business segment makes up circa 21.2% of total number of SMEs in Malaysia, and its number grew at CAGR of +8.4% between 2010 to 2015 vs. 7.3% CAGR for the SME segment.

SMEs investing again. We understand that there was some cautiousness from businesses following the surprise GE14 result. However, this general cautiousness may have abetted a little as we understand that businesses and SMEs seem to be investing again. This is evident by the robust expansion in business loans in the banking system as at August CY18. We expect business loans to further improve after more clarity in Government policies.

Good yields from SME business. We understand the NIM from this segment is circa above 2%. For 1HFY18, net interest income for this segment grew +11.2%yoy to RM462.2m. This is not surprising given the higher risk banks would have to take on.

Fast approvals will be a key differentiator. The Group is not alone in targeting the SMEs. However, it believes that its online application process and fast approval will be a key competitive advantage. It had launched an online SME financing platform where approval could be expected in 2 days and disbursement in 5 days. However, we opine that the Group's proposition is entirely unique. At this juncture, we could not yet gauge on the effectiveness of the platform. However, without the platform, the Group's Business Banking have booked +7.4%yoy higher SME loans to RM24.6b as at 1HFY18, which shows the potential to accelerate its SME loans book.

Concerns on asset quality not yet there. Of course, our main concern for the drive to grow its SME loans book will be on whether asset quality will be affected. While the credit cost for the Business Banking Group was higher than the Group's general credit cost in 1HFY18, we understand that it was not significantly higher than the industry's. In fact, we have yet to observe deterioration in asset quality. Domestic asset GIL ratio improved -27bps yoy to 1.76% as at 1HFY18.

No change to forecast. We make no changes to our forecast for now.

VALUATION AND RECOMMENDATION

We view positively at the Group's efforts to grow its SME business segment. Although, it is becoming very competitive with majority of its peers targeting this segment, we opine that the Group has a solid base to work on. With other areas also improving, we maintain our TRADING BUY call with unchanged TP of RM6.00. Our TP is based on pegging its FY19 BVPS to 0.95x which is its 5-year average PBV.

Source: MIDF Research - 1 Oct 2018