INVESTMENT HIGHLIGHTS

• In line with expectations

• NIM expansion continue to support income growth

• Better RAR loans grew at faster pace

• Asset quality improved

• Interim dividend of 8.5 sen

• No change to forecast

• Maintain BUY with unchanged TP of RM4.75 based on pegging FY20 BVPS to PBV of 1.3x

Within expectations. The Group registered 2HFY19 net profit that was within ours and consensus' expectations. It came at 46.5% and 49.3% of respective full year estimates. The +7.4%yoy growth in earnings was due to NII and Islamic banking income expansion.

NII growth continued to be supported by better NIM. For 9MFY18, NII and Islamic net financing income grew +6.8%yoy to RM648m. This was supported by the better NIM which increased +9bps yoy to 2.44%. In fact, NIM was +2bps qoq better to 2.45% in 2QFY19. This was due to impact from OPR hike, deposit initiatives and continuous improvement to the Group’s asset mix.

Meanwhile, NOII declined on lower trading income. The only income weakness was from its NOII (including Islamic non-financing income) which declined -12.7%yoy to RM152.3m. This was due to lower forex trading income, lower wealth management fee income and reclassification of higher net interest expenses on structured investment (fair value option) to NOII.

Better RAR loans grew at faster pace. Better RAR loans grew +24.7%yoy to 16.1b. This was at faster pace that the +21.3%yoy registered as at 1QFY19. Main contributor was the constant strong traction from its Alliance One Account (AOA). It expanded RM1.8b from a year ago to RM2.1b, and added RM0.5b from end 1QFY19. In addition, SME & Commercial loans grew +9.3%yoy to RM10.6b. Conversely, lower RAR loans declined -4.5%yoy to RM24.8b. This included mortgages as the Group focus on migrating it to the AOA.

GIL ratio improved from last quarter. GIL ratio as at 2QFY19 was higher by +19bps yoy to 1.37%. However, as management expected it was an improvement from 1QFY19, where it fell from 1.57%. The better asset quality was due to repayments of several major business accounts in non-residential properties and working capital, and regularised accounts in residential properties portfolio. As such, credit cost was 21bps in 2QFY19 vs. 34bps in 2QFY18.

CASA growth remained sluggish…as it grew only +0.6%yoy to RM16.0b. This growth mirrors customer deposits growth of +0.8%yoy to RM44.0b. While this may have protected NIM somewhat, we are slightly concerned that LDR had inched up to 95.5%. This may lead to NIM compression should the Group need to fight for deposits later.

Alliance@Work could moderate the pressure. The Group’s Alliance@Work product had gained good traction, as it had on boarded more than 12,000 new local employees accounts opened as at 1HFY19, with a monthly run-rate of more than 2,000 new CASA accounts. This had resulted in consumer and business CASA balance from this product to grow to RM94.8m from RM30.3m as at 4QFY18. We believe that this will moderate some potential pressure to fund its asset growth.

Transformation progressing well except for a minor bump. AOA loan balance has doubled but will likely be slightly lower than target of RM4.2b in FY19. The management is guiding for the AOA loan balances to reach RM3.7b instead. Similarly, its SME loans was targeted to reach RM9.4b but will likely hit RM8.7b. However, we opine that these are minor bumps and it is just evident that the target set by the management was very ambitious. In addition, its Alliance@Work and digital initiative have progressed well.

FORECAST

We are maintaining our FY19 and FY20 forecast for now given that the result were within expectations.

VALUATION AND RECOMMENDATION

The Group continues to perform as well as we expected. We are especially pleased with the ongoing growth in its better RAR loans and the stability of its NIM. Asset quality had also improved as guided. While more work needs to be done, especially on the deposits side, we believe that the Group remains on the right track. As such, we are maintaining our BUY call with an unchanged TP of RM4.75. Our TP is based on pegging its FY20 BVPS to PB multiple of 1.3x which is its 5-year historical average PBV.

Source: MIDF Research - 30 Nov 2018