INVESTMENT HIGHLIGHTS

• No earnings surprise

• Net profit driven by Islamic Banking income and lower provisions

• NIM pressure persisted

• Asset quality remains stable as always

• No change to FY18 and FY19 forecast

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

No major surprise in earnings. The Group’s 9MFY18 net profit came in within ours and consensus’ expectations at 72.3% and 73.1% of respective full year estimates. The earnings grew +5.0%yoy due to strong expansion in Islamic Banking income and lower provisions.

Net income driven by Islamic Banking. Net income in 9MFY18 grew +2.2%yoy driven by +6.4%yoy expansion in Islamic Banking income. NOII for 9MFY18 was flat owing to lower gains on financial instruments (-45.2%yoy to RM43.5m) and lower forex income (-14.9%yoy to RM206.0m), which negated the growth in unit trust fee income (+6.0%yoy to RM710.6m). Meanwhile, NII rose at a slower pace of +2.3%yoy (vs. +3.1%yoy in 1HFY18) as 3QFY18 NII increased by +0.7%yoy only. This was due to the NIM compression of -8bps yoy.

NIM pressure continues. We believe that the NIM compression in 3QFY18 was due to deposit repricing. Interest expense grew +13.0%yoy to RM2.27b. However, we do not believe that there was undue deposits competition that could affect NIM. We opine that one indicator for competition will be growth in FD. However, FD as at 3QFY18 grew +3.4%yoy to RM194.4b as oppose to total deposits rise of +3.8%yoy to RM334.9b and CASA growth of +4.1%yoy to RM85.4b.

Better recoveries led to lower provisions. Provisions fell by - 24.9%yoy in the 9MFY18. This was due to better recoveries as it went up by +15.3%yoy to RM190.3m.

Conservative lending ensure good asset quality. Total gross loans as at 3QFY18 expanded +4.4%yoy to RM314.5b. The steady loans growth was supported by retail loans (housing, credit cards and others) which grew +5.9%yoy to RM217.8b. More specifically, mortgages expanded +8.5%yoy to RM109.9b. Meanwhile, domestic retail loans grew +5.5%yoy to RM202.0b, whereby mortgages grew +9.0%yoy to RM108.2b. We believe that the Group’s conservatism is positive as it ensures good asset quality. GIL ratio was steady at 0.5%.

No issues 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% (revised to 4-5%) and vi) Deposit growth of 5%. We do not expect the Group will face much difficulty in achieving its FY18 targets.

FORECASTS

We maintain our FY18 and FY19 forecast given the result were in line with our expectation.

VALUATION AND RECOMMENDATION

We continue to like the Group’s ability to maintain its profitability even though it is at a steadier pace. We believe that the management conservatism bodes well for current period of external uncertainty as its stable asset quality should mean that it will be able to weather any economic shocks. This should give some value for investors looking for stable stocks. Moreover, we believe that the Group will stand to benefit for being retail-centric, especially in the mortgage segment, given there seem to be a focus on affordable housing from the Government. 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 - 26 Oct 2018