INVESTMENT HIGHLIGHTS

• In line with expectations

• NII decline possibly due to NIM compression

• Robust gross loans growth with mortgages a main driver

• Lower ECL and higher recoveries led to writeback

• Asset quality remains stable as always

• Maintaining our forecast for now

• Maintain BUY with an adjusted TP of RM27.20 (from RM27.15) based on pegging FY20 BVPS to 2.2x

Earnings in line with expectations. The Group posted a +0.3%yoy earnings growth in 1QFY19. This was in line with our and consensus' expectations at 24.7% and 24.6% of respective full year estimates.

Main driver for earnings growth were writebacks. The quarter saw lower ECL for the Group as Stage 1 (12 month) ECL increased by +64.4%yoy to RM108.4m. There were also higher recoveries of +18.4%yoy to RM57.4m in the quarter.

Total income was dragged by lower NII and NOII. Total income was flattish at -0.7%yoy. It was dragged by lower NII and NOII which fell -1.0%yoy and -1.6%yoy respectively. The decline in NII was probably due to NIM compression as interest expense grew at faster rate than interest income. These grew at +11.0%yoy to RM2.22b and +5.2%yoy to RM4.1b respectively. Meanwhile, the decrease in NOII was due to lower fee and commission income, and forex profits. However, Islamic banking income continues to moderate the drag in NII and NOII by growing +3.4%yoy.

Deposits grew faster than loans. We opine another reason for the higher interest expense growth was the faster pace expansion in deposits when compared against gross loans growth. Total deposits grew +5.2%yoy to RM343.0b as compared to a gross loans growth of +4.4%yoy to RM320.4b. However, we were pleased that CASA grew at a healthy +5.5%yoy to RM87.4b whilst FD expanded +3.3%yoy to RM195.7b, which may have moderated the pressure on NIM.

Gross loans growth driven by mortgages. The main driver for the gross loans growth was residential mortgages which grew +8.1%yoy to RM114.2b. Meanwhile, corporate lending had a good growth of +4.7%yoy to RM46.7b.

Asset quality remains sound as always. The Group GIL ratio was stable at 0.5% as at 1QFY19.

FORECASTS

We are maintaining our FY19 and FY20 earnings forecast given the result were within our expectation.

VALUATION AND RECOMMENDATION

Although the Group's revenue appeared weak in 1QFY19, it was within our expectations. The NII decline could be due to the its conservativeness which seem to sacrifice some growth and higher yielding assets to ensure that it is able to maintain its profitability at a steadier pace. Furthermore, we opine that the Group's stable asset quality and conservative approach will mean that the Group will be able to weather any potential stress to the banking system better. We believe that the Group's current trading valuation does not reflect this. As such, we believe that the stock is currently undervalued. Therefore, we maintain our BUY call for the stock with adjusted TP of RM27.20 (from RM27.15) as we roll over our valuation to FY20. Our TP is based on pegging FY20 BVPS to 2.2x PBV which is its 5 year historical PB multiple.

Source: MIDF Research - 30 Apr 2019