INVESTMENT HIGHLIGHTS

• Within expectations

• Earnings growth supported solely on write backs as PPOP was flattish

• NII under pressure due to NIM compression

• Gross loans declined while deposits growth were led by FD

• Asset quality was still an issue

• Maintain earnings forecast

• Downgrade to NEUTRAL with revised TP of RM2.10 as we factor in current uncertainties

Within expectations. The Group's 1HFY19 came within ours and consensus' expectations. It was 52.4% and 52.3% of respective full year estimates. Main driver for the +36.5%yoy increase in net profit was the net write backs of RM36.1m vs. impairment of RM82.6m same period last year.

Write backs flowing through. There were a write back on loans of RM11.8m in 1HFY19 as compared to impairment of RM103.1m in 1HFY18. We believe that this is due to the resolution of the impaired accounts we observed in FY18.

Marginal increase in PPOP. PPOP grew marginally at +0.6%yoy lifted by lower OPEX as income was flat. OPEX fell -0.4%yoy due to -0.8%yoy decrease to RM400.1m in personnel cost and decline in general & administration cost of -5.0%yoy to RM52.5m.

Pressure on NII. Total income did not grow in 1HFY19 as the +15.2%yoy expansion of NOII was dragged by NII contraction. NII fell - 12.0%yoy due to marginal decrease in gross loans and strong fixed deposits growth which affected NIM. We estimated that NIM fell -29bp yoy to 1.63%.

Gross loans contracted. Gross loans declined marginally by -0.4%yoy to RM47.6b despite strong growth in retail segment (i.e. mortgages and for personal use). Mortgages went up +17.2%yoy to RM11.1b while loans for personal use increased +10.1%yoy to RM844.6m. One of the segment that pulled gross loans down was SME loans which fell - 28.0%yoy to RM8.5b.

Deposits continue to be led by fixed deposits. Deposits grew +12.3%yoy to RM59.2b. However, the major contributor was in FD which rose +28.4%yoy to 47.1b. Meanwhile, CASA fell -3.6%yoy to RM8.2b. We believe that this caused the pressure to NII.

GIL ratio remained elevated. GIL ratio as at 2QFY19 was up by +18bp qoq to 3.49%.

FORECAST

We are maintaining our forecast given the result were within expectations.

VALUATION AND RECOMMENDATION

While the Group saw strong growth in earnings for 1HFY19, it was due to write backs. In our opinion, income remains weak affecting PPOP. We were disappointed that deposits were still driven by FD and we believe that this had caused the NIM compression and pressure to NII. CASA declined and with current competitive climate, we believe that the Group will have difficulties in attracting more CASA to alleviate that pressure. We understand that the Group have recently launched products that could attract the much needed CASA. Nevertheless, we are turning more cautious of the Group and peers of its size. We opine that external factors, such as the escalation of the China-US trade tension, have heighten the risk to asset quality. Therefore, we are downgrading the stock to NEUTRAL (from BUY). We are revising our TP downwards to RM2.10 (from RM2.50) as we lower our PBV of 0.4x (from 0.5x) as we take into account the effect of current uncertainties on valuation.

Source: MIDF Research - 28 Aug 2019