INVESTMENT HIGHLIGHTS

• Earnings within expectations with lower OPEX

• NII continue to be driven by gross loans growth in focussed areas

• NIM continue to compress

• Asset quality in check

• Interim dividend of 5.0sen

• No change to forecast, Maintain NEUTRAL with unchanged TP to RM4.10

In line with expectations. The Group 1HFY19 net profit came at 51.0% and 53.6% of ours and consensus’ full year estimates respectively. The +5.5%yoy earnings growth was mainly supported by lower OPEX.

MSS benefits continue to be apparent. For 1HFY19, OPEX fell - 8.7%yoy as personnel cost declined -1.5%yoy to RM607.7m. Another major contributor was the lower admin & general expenses which fell - 50.0%yoy to RM101.1m. This resulted in CI to improve by -6.8ppts yoy to 50.4%. The management expects that CI could be kept at below 55% level as targeted for FY19.

Gross loans growth in focus areas continue to feed NII. NII grew +3.8%yoy mainly driven by steady loans growth. Gross loans growth grew +7.5%yoy to RM99.9b driven by expansion to the Group’s focussed loans book segments. The mortgage, SMEs and card receivables expanded by +20.8%yoy to RM29.1b, +19.9%yoy to RM18.1b and +22.0%yoy to RM2.2b respectively. Meanwhile, NOII was decent at +2.9%yoy higher lead by the +13.4%yoy to RM262.8m rise in Insurance income.

NIM under pressure but will be stable. The gross loans growth was moderated by NIM compression. While 1HFY19 NIM was -2bps yoy lower, the 2QFY19 NIM had compressed by -6bps yoy and -11bps qoq. This was due to higher cost of fund but we understand that this was due to issuance of term notes. Nevertheless, gross yield had improved due to the Group’s focus on growing its SME loans book.

CASA growth lead by non-retail segment. Total deposits grew +7.6%yoy to RM100.8b. We were encouraged to see that this was contributed by faster CASA growth as it expanded +13.4%yoy to RM22.0b. Comparatively, fixed deposits grew +6.1%yoy to RM78.8b. We believe that the CASA growth was the result of on boarding of loans from business, as non-retail CASA rose +26.5%yoy to RM10.5b.

Asset quality in check. The Group’s GIL ratio as at 2QFY19 was -16bps yoy lower to 1.72%. The improvement came from lower gross impaired loans in the wholesale business where it was RM758m compared to RM892m as at 2QFY18. However, we are slightly concerned by higher gross impaired loans in the construction, wholesale & retail trade and mortgage segments. These increased by +126.8%yoy, +96.8%yoy and +10.4%yoy to RM32.3m, RM93.0m and RM354.7m respectively. Nevertheless, we do not foresee significant headwinds in these segments as yet.

On track to achieve FY19 target. Earlier, the management had guided the following 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%. We believe the Group is on track to reach these targets.

No change to forecast. We are maintaining our FY19 and FY20 forecast.

VALUATION AND RECOMMENDATION

We commend the management continued feat in managing cost, which was a pleasant surprise. We believe that this will allow the Group to pace its needed investments in order to grow its value proposition in its focused areas. However, NIM continues to be under pressure. Retail CASA growth remains sluggish (+3.6%yoy) compared to total deposits and non-retail CASA growth. Moving forward, we would like to see this CASA segment to grow at a faster rate in order to stabilise the NIM compression. All-in, we maintain our NEUTRAL call with unchanged TP of RM4.10. 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 Nov 2018