INVESTMENT HIGHLIGHTS

• In line with our and consensus’ expectations

• Lower NII was moderated by Islamic banking income and NOII

• OPEX well contained, positive JAWS

• Strong gross loans growth matched with deposits growth driven by fixed deposits

• Slight uptick in GIL ratio but due to proactive R&R

• Higher than expected dividend of 12.5sen

• Maintain BUY with unchanged TP of RM6.35

In line with expectations. The Group’s 1HFY19 came in at 49.8% and 51.6% of ours and consensus’ full year estimates respectively. Earnings growth was supported by continuation of expansion in Islamic banking income and steady provisions.

Weak NII overcame by Islamic banking income and NOII. Net fund based income fell -2.6%yoy to RM2.42b due to higher funding cost from OPR hike last year and partial impact to OPR cut in May this year. This came from the conventional fund base as NII fell -5.7%yoy in 1HFY19. However, growth in Islamic banking income remained strong, rising +16.2%yoy in 2QFY19 resulting in +26.0%yoy expansion in 1HFY19. Meanwhile, NOII grew +8.1%yoy supported by higher IB related fees (+28%yoy to RM75m), net trading and investment income (+183%yoy to RM273m) and insurance underwriting surplus.

Contained OPEX lead to rebound in PPOP. Cumulative establishment cost (including IT related cost) and marketing expenses went up +6.2%yoy to RM391.6m and 12.8%yoy to RM126.3m respectively. However, this was moderated by a rise of only 1.4%yoy to RM1.02b in personnel cost, leading OPEX to be well contained at +2.7%yoy growth. With better income growth in 2QFY19 and the contained OPEX, PPOP rebounded to post growth of +11.9%yoy and +5.0%yoy in 2QFY19 and 1HFY19 respectively.

Lower loan impairment and stable asset quality. Credit cost improved -2bp yoy as allowances for loan impairment fell -7.2%yoy to RM168m, coming from the writebacks in 1QFY19. Asset quality was relatively stable with 2.15% GIL ratio as at 2QFY19, a slight uptick of +3bp qoq mainly coming from Singapore.

Proactive R&R accounts expected to reverse by year end. The overall uptick in GIL ratio was due to proactive management of the Group’s loans book where certain accounts had been restructured & rescheduled (R&R). The management expects these R&R account to return to performing by year end. With this we expect GIL ratio to improve to circa 2%, within management’s target.

Gross loans continue to grow strongly. Gross loans grew +6.9%yoy to RM172.3b. Major contributors were mortgage, SME and Singapore operation. The loans book in these segments rose +11.6%yoy to RM56.4b, +6.7%yoy to RM19.6b and +11.2%yoy to RM12.4b. We believe that the Group’s digital initiative had played a key role in the loans expansion in these segments.

Deposits growth led by FD but domestic CASA showing promise. Total deposits grew +10.9%yoy to RM185.0b. Main driver was fixed deposit (FD) growth of +23.5%yoy to RM114.6b. This was partly the driver for the higher interest expense. However, a promising trend was the strong growth in domestic CASA, which increased +6.1%yoy to RM41.8b. This outstripped the overall CASA growth of +2.3%yoy to RM49.2b. Most of the domestic CASA growth was from the corporate segment and we understand in the Islamic banking. We expect that this could moderate the pressure to NII.

Highest dividend payout. The Group announced an interim dividend of 12.5sen which a payout ratio of 40.2%, its highest ever. This was above our expectations as we had forecast a payout ratio of circa 35%. Revising our payout ratio to 40%, we are revising our dividend forecast to 25sen which translate to a dividend yield of circa 4.4% at current price level.

Tracking target. Recall, for FY19, the management is targeting the following: (1) ROE of 10.5%, (2) loans growth of +5.0%yoy, (3) CASA growth of +5.0%yoy, (4) GIL ratio of less than 2.0%, and (5) CI ratio of 49%. With the exception of CASA growth and GIL ratio, the Group is on track to achieve its target. Management expect that GIL ratio will improve in the coming quarters as those R&R accounts are reclassified as performing. We believe that the CASA growth target will be challenging to meet given the competitive deposits environment. However, the early signs are promising as evident by the strong domestic CASA growth.

FORECAST

We are maintaining our FY19 and FY20 forecasts.

VALUATION AND RECOMMENDATION

We opine that the Group have performed well in 1HFY19 despite the challenging environment. Loans and deposit growth remains strong and this could be due to the well-executed FIT22 and AGILE strategy. We noted that there have been good traction with its initiatives such as the +7.6% YTD growth in affluent customer acquisition. While NII is under pressure, we believe that it will normalise as deposits are repriced lower. All-in, we are maintaining our BUY call, with an unchanged TP of RM6.35. Our TP is based on pegging its FY20 BVPS to 0.97x.

Source: MIDF Research - 27 Aug 2019