INVESTMENT HIGHLIGHTS

• Meeting expectations

• Earnings growth supported by income growth

• Strong NOII growth

• Strong loans growth and robust deposit growth

• Interim dividend 14sen

• No change to FY19 and FY20 forecast

• Maintain BUY with revised TP of RM6.30 (from RM6.80) to reflect impact of current uncertainties to its valuation parameter

Results in line. The Group registered a net profit of RM2.7b for 1HFY19. This was in line with expectations coming in at 54.1% and 54.3% of our and consensus’ full year estimates respectively. The +10.6%yoy earnings growth was supported by income growth and lower provisions.

NOII driving operating income growth. Operating income in 1HFY19 grew +4.8%yoy due to strong NOII growth of +8.5%yoy. Trading and FX made up most of the gains in NOII as it expanded +54.1%yoy to RM1.01b from improved capital markets. This was moderated slightly by the -3.3%yoy decline to RM1.19b in fee & commission income. Meanwhile, NII rose +3.3%yoy despite NIM compression of -7bp yoy to 2.46% and negative adjustment related to MFRS9. The main driver was the strong gross loans growth.

Lower provisions. Provisions fell by -33.6%yoy due to lower loan provisions and writebacks for commitment and contigencies of RM108.6m (vs. RM26.8m in 1HFY18). Loan provisions was lower by +15.7%yoy to RM629m from higher writebacks which was MFRS9 related. As such, credit cost was seen at 35bp, which if we excluded this MFRS9 related writebacks, it would have been 54bp.

Gross loans growth remains strong. Group gross loans grew +6.9%yoy to RM355.9b. In local currency terms, loans in Malaysia, Indonesia and Thailand expanded +6.6%yoy, +2.5%yoy and +10.0%yoy respectively. The Group also saw gross loans growth in its consumer banking (+8.3%yoy to RM175.8b), commercial banking (+4.4%yoy to RM66.4b) and wholesale banking (+6.3%yoy to RM113.7b). Overall, gross loans growth was driven by residential mortgage expansion in its three key markets namely Malaysia (+8.4%yoy), Indonesia (+13.5%yoy) and Thailand (+17.4%yoy).

Robust deposits growth. Group deposits expanded +9.9%yoy to RM383.8b and +8.1%yoy if forex fluctuations were excluded. However, the deposits were driven by fixed deposits which grew +20.5%yoy to RM174.0b, outpacing CASA growth of +6.0%yoy to RM133.3b.

F23 investments dominates OPEX. The Group's OPEX for 1HFY19 increased +8.7%yoy. However, we are not concerned by this as it was mainly due to investments and Forward23 related expenses. Discounting this, OPEX only rose +3.7%yoy instead.

Target for FY19. Recall, the management will be targeting the following for FY19; (1) ROE of between 9.0% and 9.5%, (2) dividend payout ratio of 40% and 60%, (3) total loans growth of +6.0%yoy, (4) credit cost of between 40 to 50bps, (5) CET1 ratio of more than 12%, and (6) CI ratio at current level. With its 1HFY19 performance, we do not foresee the Group to have much difficulties in attaining its target.

FORECAST

We are maintaining our FY19 and FY20 earnings forecast.

VALUATION AND RECOMMENDATION

We were pleased by the NOII rebound in 2QFY19. In addition, NII growth was decent despite the NIM compression and higher deposits growth. We recognize that there some MFRS 9 adjustments that favoured the Group, but income did grow at a decent pace. All-in, we are maintaining our BUY call. However, we are revising our TP to RM6.30 (from RM6.80) as we peg its FY20 BVPS to a lower PBV of 1.1x (from 1.2x). We have observed that external situation such as the trade escalation increasing risk and seeping into sentiments negatively. Therefore, we are adjusting our PBV to reflect this volatile and uncertain environment.

Source: MIDF Research - 30 Aug 2019