INVESTMENT HIGHLIGHTS

• Normalised earnings in line with expectations

• Lower provisions and OPEX led earnings growth

• Income weak but improving

• Gross loans grew robustly

• Tweaking FY18 core net profit (-5.1%) and FY19 (-7.8%) forecast

• Maintain BUY with adjusted TP of RM7.70 (from RM7.85)

Net profit in line. The Group 9MFY18 normalised earnings was within our and expectations, coming in at 71.0% and 74.5% of respective full year estimates. The normalised net profit excluded the CPAM & CPIAM gain of RM928m but included the CSI gain of RM163m. On a reported net profit basis, it was 77.9% and 82.8% of ours and consensus' unadjusted full year estimate respectively.

Earnings growth led by lower provisions and OPEX. Total provisions fell -26.8%yoy due to lower loans provisions. It was lower -30.7%yoy to RM1.14b as consumer and commercial segment improved by -53.2%yoy and -48.6%yoy respectively. As for 9MFY18 OPEX, it fell by -6.4%yoy due mainly from deconsolidation of CSI and forex impact. If we exclude the forex impact, OPEX will still have improved by -2.1%yoy.

Income weak but improving. The 9MFY18 NII and NOII posted a decline of -3.7%yoy and -10.0%yoy respectively. The insipid NII was due to NIM contraction in Indonesia and, softer commercial and wholesale banking, while NOII was impacted by weak capital market in Malaysia in 2QFY18. However, as we had expected, income in 3QFY18 showed an improvement from 2QFY18. Total income grew +5.2%qoq with NII and NOII expanding +2.4%qoq and +13.4%qoq. While this was still lower than in 3QFY17, we opine it was encouraging as moderate the decline seen in 1HFY18.

Robust group gross loans growth. Group gross loans as at 3QFY18 grew by +4.9%yoy to RM338.4b. In loans currency terms, group gross loans expanded +7.3%yoy. Malaysia saw the highest growth rate of +11.0%yoy with consumer segment growing +8.4%yoy. Of this, mortgages grew +9.7%yoy.

Deposits grew at better pace. Group deposits increased +3.7%yoy to RM367.0b, faster than +1.5%yoy posted as at 2QFY18. This was led by wholesale banking which grew +10.9%yoy to RM157.3b. In local currency term, deposits grew +6.0%yoy, with Malaysia, Indonesia, Thailand and Singapore expanded +4.4%yoy, +3.8%yoy, +5.6%yoy and +8.7%yoy respectively. ew also note that CASA in Malaysia grew +6.1%yoy.

FY18 targets on track. Recall, the management is targeting the following for FY18; (1) ROE of 10.5%, (2) Dividend payout ratio of 40-60%, (3) total loans growth of +6.0%yoy, (4) credit cost of 0.55-0.60%, (5) CET1 ratio of 12.0% and (6) CI of 50.0%. It seems that the Group is on track to achieve its targets except for its ROE target. Income remained weak but appear to be improving but in our opinion will not be enough to boost earnings to reach its ROE target. In addition, macroeconomic uncertainties will play a factor. However, we foresee ROE to be close to current level which is still decent in our opinion.

FORECAST

We tweaked our core net profit in FY18 downwards by -5.1% and FY19 net profit by -7.8% as we believe current macroeconomic uncertainties warrant some conservatism.

VALUATION AND RECOMMENDATION

We opine that the Group perform well given current circumstances in Indonesia and the soft market conditions in 2QFY18 in Malaysia. It was able to mitigate the contraction in income by containing cost and provisions. Besides, income seems to be improving and we believe the robust loans growth will give some uplift in NII. With no significant change to the Group's fundamental, we are maintaining our BUY call. However, we are adjusting our TP to RM7.70 (from RM7.85) as we had tweaked our FY19 earnings forecast. Our TP is based on pegging its FY19 BVPS to a PBV of 1.3x.

Source: MIDF Research - 30 Nov 2018