INVESTMENT HIGHLIGHTS

• Earnings in 1HFY19 within expectations

• NIM compression continue to impact NII

• Stable gross loans growth albeit currently below target

• Asset quality remains sound and stable

• Interim dividend of 33sen

• Tweaking forecast by -1.0% and -1.2% for FY19 and FY20 respectively

• Maintain BUY with an revised TP of RM24.00 (from RM27.20) based on pegging FY20 BVPS to 2.0x

Earnings in line with expectations. The Group saw its 1HFY19 net profit slightly down by -2.1%yoy due to lower NII. However, this was still within ours and consensus’ expectations coming in at 48.1% and 47.9% of respective full year estimates.

NIM compression impacted NII. For 1HFY19, NII fell -1.2%yoy as it was impacted by the OPR cut in May’19 resulting in a -13bp NIM compression. Evidently, 2QFY19 NII fell -1.5%yoy and -1.5%qoq due to higher interest expense (1HFY19: +7.6%yoy, 2QFY19: +4.4%yoy) as the Group could not reprice its fixed deposits until maturity. NII is expected to be under pressure in 2HFY19 as the management expects high single digit NIM compression.

NOII rebounded to moderate income weakness. NOII in 1HFY19 grew +8.1%yoy due to a rebound in 2QFY19, where it grew +18.9%yoy and +8.4%qoq. The main contributors were higher net fee and commission income in 2QFY19, which grew +11.7%yoy and 19.9%qoq to RM191.4m, and overall strong expansion in investment income, rising +335%yoy to RM113.3m in 1HFY19.

Cost within control. OPEX grew at a steady pace of +4.7%yoy. However, CI ratio was slightly higher at 34.2% from 33.1% in the same period last year, due to tepid income growth.

No change to the resilient asset quality. GIL ratio was maintained at 0.5%, whilst loan loss provisions fell -27.9%yoy. Going forward, the management expects asset quality to remain strong given the stable base of its loans book.

Loans growth slightly off target but stable. Gross loans grew +4.2%yoy to RM323.7b. Although, this was slightly below the Group’s target of +5.0%yoy for FY19, we opine that it is commendable. Main contributor was residential mortgages which grew +7.8%yoy to RM116.3b.

Deposits growth continues to be strong. We believe that the NIM compression was also due to the faster pace expansion in deposits. Total deposits grew +5.8%yoy to RM349.1b as compared to the +5.2%yoy to RM343.0b registered as at end 1QFY19. Nevertheless, in our opinion, the fact that CASA saw solid 4.6%yoy to RM88.2b whilst FD expanded +2.7%yoy to RM196.5b may have moderated the pressure on NIM.

Hong Kong exposure minimal. We understand that the Group’s exposure in Hong Kong is rather minimal with a less than 5% contribution to Group earnings. In term of its loans book, Hong Kong represents only 4.8% to the total. Moreover, management indicated that it does not have any “lumpy” accounts. Hence, we do not expect the situation in Hong Kong will be a major drag to the Group’s earnings in 2HFY19.

FORECASTS

We are tweaking slightly our FY19 and FY20 earnings forecast downwards by -1.0% and -1.2% respectively. However, we have to clarify that this is due to housekeeping rather than anything else.

VALUATION AND RECOMMENDATION

The Group’s income continues to be under pressure as a result of decline in NII. On the contrary, we were pleased that NOII rebounded while Islamic Banking income maintains a good supporting role. This is our only concern for the Group as the Group's stable asset quality and conservative approach ensures the resiliency of the Group’s earnings. We believe that its share price does not reflect this. As for NII, we believe it will normalize as deposits get repriced. Furthermore, our economic team does not expect another OPR cut at current juncture. All-in, we maintain our BUY call for the stock.

In terms of our TP, we are revising it downwards to RM24.00 (from RM27.20). However, we have to note that this is more due to valuation as we factor in the impact of the escalation of the trade spat between the US and China and other external pressures. We expect that this external event have injected further uncertainty and volatility to its share price movements. Hence, we are pegging our FY20 BVPS to a lower PBV of 2.0x which is 1 standard deviation below its 5 year historical average.

Source: MIDF Research - 15 Aug 2019