Results

• 1QFY16 core net profit of RM121.9m (+30.7% qoq; -6.8% yoy) only accounted for 21.7% and 21.5% of HLIB and consensus forecasts, respectively, below expectations.

Deviations

• Higher than expected provision as credit cost normalized (annualized 18bps vs. HLIB’s 12bps assumption) as well as lower than expected non-interest income.

Dividend

• None.

Highlights

• 1QFY16 earnings improved sharply qoq on loans growth, recovery in NIM (after one-off adjustment in 4Q15 as well as better yield and contained rise in cost of fund) higher NOII and contained overheads and provision. However, it was still lower yoy on lower NIM and NOII as well as normalization of provision.

• Deposits contracted qoq but still grew 10.6% yoy and CASA remained among the highest at 34.6%.

• Key priorities are improvement in risk adjusted returns (focus on SME and commercial banking as well as higher margin consumer products), deposit growth faster than loans expansion (banking on its strong deposit franchise) and client based fee income (t rade, FX, wealth management, bancassurance, etc.).

• Keep FY16 ROE KPI at 12-13% despite only achieving 10.9% in 1Q and normalization of provision. Looking at continued growth in NII to catch up. Thus far in 2Q, NIM still growing sequentially but is tapering. Confident that even if it falls short, would not be significantly below KPI. However, to be conservative, we are projecting ROE of 11.1% as 1Q annualized credit cost of 18bps is below guidance of 20 - 25bps. This suggests that normalized provision will be a drag to revenue growth.

• Asset quality improved qoq. Severe stress tests (akin to AFC stresses) show capital and profitability remained intact albeit some impact on the latter. Thus far, no signs of stress yet but if the current uncertainties prolongs, expect some impact albeit not significant.

Risks

• Unexpected jump in impai red loans and lower than expected loan growth. Intense competition from much bigger players.

Forecasts

• FY16-18 cut by 9.1-9.7% to reflect higher provision (20bps vs. guidance of 20-25bps) and lower NOII.

Rating

HOLD

Positives

• Strong asset quality and deposit franchise (the latter helps in protecting NIM), strong niche in consumer and SME, potential M&A excitement and robust capital.

Negatives

• Stiff competition from signi ficantly larger players with bigger scale and reach as well as relatively lower liquidity against peers.

Valuation

• Target price cut to RM4.15 (vs. RM4.92) based on Gordon Growth with ROE of 11.1% and WACC of 9.5%.

Source: Hong Leong Investment Bank Research - 19 Aug 2015