INVESTMENT HIGHLIGHTS

• Within expectations

• Net profit growth from lower provisions

• NII cushioned the weaken NOII

• Loans growth robust

• Asset quality stable especially on consumer segment

• Tweaked FY19 forecast by -1.4%

• Maintain BUY with unchanged TP of RM11.40, based on PB multiple of 1.6x

Met expectations. The Group 9MFY18 net profit was within expectations. It came at 71.7% and 73.7% of ours and consensus' full year estimates respectively. The earnings grew +7.4%yoy as provisions came in lower by -18.9%yoy.

NOII did a U-turn. NOII went from growth of +7.4%yoy in 1HFY18 to post a decline of -1.2%yoy in 9MFY18. This was due to NOII contracting by -15.3%yoy 3QFY18. The steep decline was attributable to +28.5%yoy increase in insurance related expenses, to RM1.57b (e.g. benefits and claims incurred, fee and commission expenses etc.).

NII cushioned the weaken NOII. NII went up by +1.6%yoy on continued loans growth in retail franchise and corporate segment across home markets. While NIM showed a compression of -7bps yoy in 9MFY18, it had actually improved slightly (by +3bps qoq) in 3QFY18. Most of the NIM compression could be traced back to 2QFY18 where the Group took in more deposits in an effort to manage liquidity.

Loans grew robustly. Gross loans grew +4.5%yoy to RM507.7b and on local currency basis, it grew +6.4%yoy. Malaysia, Singapore and Indonesia reported a gross loans increase of +4.9%yoy to RM292.5b, +7.1%yoy to SGD41.9b and +8.9%yoy to IDR136.1t respectively. Gross loans growth in Malaysia was led by mortgages (+8.2%yoy to RM85.5b), auto finance (+5.4%yoy to RM47.6b), unit trust (+7.0%yoy to RM28.3b) and SME segments (+14.8%yoy to RM16.5b).

Deposits growth led by Malaysia. Group deposits expanded +3.8%yoy to RM536.6b. This was mostly contributed by Malaysia as deposits rose +6.7%yoy to RM331.3b. Deposits in Singapore went up +1.7%yoy to RM44.9b, while in Indonesia deposits fell -7.2%yoy to RM110.8b. However, this could be due to effect of depreciated rupiah.

Provisions were considerably lower...even accounting for provisions made for exposure for two Hyflux projects in 2QFY18. Total provisions declined -5.5%yoy in 3QFY18 due write backs in financial investments and financial assets of RM15.8m and RM15.4m respectively.

Asset quality stabilized. We were relieved that asset quality did not deteriorate significantly further. GIL ratio as at 3QFY18 came in at 2.65% vs. 2.64% registered as at 2QFY18. There were an uptick in GIL ratio in the retail SME and corporate banking segment in Malaysia but overall consumer asset quality remained stable.

NIM may normalise in 4QFY18. We opine that NIM will likely normalise in 4QFY18 to come within the management's revised guidance which is flat to marginal compress NIM in FY18. Recall that the management indicated that for 2HFY18, it will be focusing on improving its NIM via releasing some of the more expensive deposits and maintain loan pricing discipline. We believe that deposit competition will ease due to the extension of observation period of the Net Stable Funding Ratio requirements.

FORECAST

We are maintaining our FY18 forecast but tweaking our FY19 forecast slightly by -1.4% to remain conservative in view of macroeconomic uncertainties.

VALUATION AND RECOMMENDATION

We caught by surprise by the weak NOII in 3QFY18. However, the Group's provisions were lower despite the issue with asset quality in Singapore. We understand that there could be potentially be a resolution to this issue in FY19, which could see its impairment being written back but it is too early for us to account for this. Despite all of this, we remain optimistic of the Group's prospects as we believe loans growth momentum could be carried into FY19. Therefore, we reiterate our BUY call with unchanged TP of RM11.40. We based our TP on pegging FY19 BVPS to PB of 1.6x. In addition, its dividend yield of 6.1% should mitigate any downside risk.

Source: MIDF Research - 30 Nov 2018