INVESTMENT HIGHLIGHTS

• Upperbound of expectations

• Support from strong Islamic banking income and lower provisions

• Loans growth driven by mortgage and SME

• Uptick in GIL ratio possibly from overseas

• Upward revision in FY18 and FY19 forecast

• Maintain TRADING BUY with unchanged TP of RM6.00

Higher bound of expectations. The Group registered a strong 9MFY18 net profit growth of +16.8%yoy. As a result, it was at the upper bound of our and consensus’ expectations. Its 9MFY18 earnings came in at 80.0% and 79% of respective full year estimates. Main driver was the strong Islamic banking income and lower provisions.

Islamic banking income above expectations. NII in 9MFY18 had a robust growth of +4.9%yoy while NOII was flattish with +0.7%yoy dragged by lower IB and brokerage income. Main contributor for income growth was Islamic banking income as it grew +26.5%yoy. This was due to both net fund and non-fund based income which expanded +23%yoy to RM942m and +79%yoy to RM99m respectively.

Better NIM overall but moderated in 3QFY18. NIM for the 9MFY18 was circa +9bps yoy better at 2.27%. This was boosted by the OPR hike at the start of the year. However, there was a moderation in 3QFY18 as NIM fell -6bps qoq to 2.23% due to re-pricing of deposits. However, this was still higher than the level seen in 3QFY17.

Higher OPEX but CI improved. OPEX in 9MFY18 expanded +6.4%yoy due to higher personnel and IT related expenses. Nevertheless, CI improved to 49.0% from 49.5% in 9MFY17. This was due to the better income and evident that OPEX was well contained.

Loans growth supported by mortgages and SME. Gross loans as at 3QFY18 grew at slightly higher pace of +4.0%yoy to RM164.3b from +3.1%yoy posted last quarter. The two biggest contributors to loans book, i.e. mortgages and SME, still continue to support loans growth. These grew +15.7%yoy to RM45.0b and +6.2%yoy to RM21.4b respectively. Meanwhile, gross loans from wholesale banking fell - 10.0%yoy to RM45.2b. Overseas operations' gross loans improved +0.8%yoy to RM15.8b.

Uptick in GIL ratio from overseas operations. GIL ratio as at 3QFY18 was up +4bps on sequential quarter basis to 2.37%. However, this was due to conversion of impaired bonds to loans. Excluding this restructured account, GIL ratio would have been at 2.28%. We believe this was from its overseas operations as domestic GIL ratio was -6bps qoq better to 1.70%. Meanwhile, the Group's oil & gas exposure have decreased slightly by RM0.1b to RM4.8b from 2QFY18. This represents 2.9% of total loans book.

Source: MIDF Research - 28 Nov 2018