KEY INVESTMENT HIGHLIGHTS

• 9MFY19 earnings within ours and consensus' expectations

• NII for 9MFY19 appeared weak but improvement in 3QFY19 suggest some normalisation

• Growth in NOII and Islamic banking income was able to moderate the weak NII

• Loans growth led by housing loans

• Asset quality remains solid, which means stability should there be any economic shocks

• No change to earnings forecast

• Maintain BUY with unchanged TP of RM24.00

Within expectations. The Group posted its 9MFY19 earnings within ours and consensus' expectations. Its PATAMI of RM4.11b came at 72.7% and 71.8% of respective full year estimates.

Growth in NOII and Islamic banking income propped NII. The Group earnings fell by -1.9%yoy mainly due to marginal decline in NII and higher OPEX. NII declined by -0.5%yoy as NIM came in lower by - 9bp yoy to 2.15%. The NIM compression was attributable to the cut in OPR in May CY19 and higher funding cost. Interest expense grew +4.0%yoy to RM6.67b vs. +1.9%yoy expansion to RM12.3b in interest income. However, NIM was stable on a sequential quarter basis suggesting some normalisation. Meanwhile, NOII grew +5.8%yoy and Islamic banking income rose +6.2%yoy to moderate the pressure to NII.

CI ratio still lowest in the industry. The 9MFY19 CI ratio was 34.3%. Despite an increase of +1.3%-pt, it was still lowest in the industry. While the lower total income affected the CI ratio, OPEX also grew by +5.5%yoy due to higher personnel and establishment cost. These rose +7.3%yoy to RM2.04b and +8.4%yoy to RM524.6m respectively.

Decent gross loans growth. Gross loans grew at decent pace of +4.1%yoy to RM327.2b. Main driver continued to be housing loans which expanded +8.3%yoy to RM119.0b. Corporate loans also grew at a reasonable pace of +2.3%yoy to RM47.0b.

Better CASA growth compared to fixed deposits’. Total deposits grew +3.7%yoy to RM347.2b. We were pleased as CASA grew at faster pace than fixed deposits. It grew +3.4%yoy to RM88.4b. Meanwhile, fixed deposits expanded +1.8%yoy to RM197.8b. This could partly explain the stable NIM in 3QFY19.

Asset quality remains sound as always. The Group GIL ratio was stable at 0.5% as at 3QFY19. In the meantime, allowance for loan losses fell -17.5%yoy, keeping credit cost to circa 6bp.

No change in earnings forecast. We are maintaining our earnings forecast for FY19 and FY20 as the Group's result were within expectations.

Valuation and recommendation. The Group's 9MFY19 NII was within our expectations despite the marginal decline. Besides, we observed that 3QFY19 improved on sequential year and quarter basis. In addition to the stable quarter-onquarter NIM, suggests that were some normalisation in the quarter. We also believe that the pressure to the Group's NII could be due to the its conservativeness which seem to sacrifice some growth and higher yielding assets to to maintain its profitability at a steadier pace and a solid asset quality. Furthermore, we opine that the Group's 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 unchanged TP of RM24.00 based on pegging FY20 BVPS to 2.0x which is 1 standard deviation below its 5 year historical average.

Source: MIDF Research - 8 Nov 2019