Results

• 1QFY16 net profit of RM339.5m (-34.6% qoq; -15.5% yoy / +3.1% yoy if exclude gain from part sale of insurance arm in 1Q15) accounted for 19% and 20.9% of HLIB and street estimates, respectively, below expectations.

Deviations

• Sharp plunge in NIM and lower-than-expected NOII. Contraction in loans was another contributor but this was due to lumpy corporate repayments.

Dividend

• None.

Highlights

• 1Q results weak on plunge in NIM, loans contraction (albeit due to lumpy corporate repayments) and decline in NOII (subdued capital markets as well as weak business and consumer sentiment). The decline was partly offset by lower overheads and continued provision write-back.

• While it is maintaining loans growth target of 4-5%, NIM will continued to be depressed arising from its ongoing portfolio rebalancing (reducing exposure to HP and prioritize focused organic growth). Given the sequential contraction of 19.5bps (excluding 1.5bps one-off adjustment) in 1Q NIM and in view of continued competition, it will be a tall order for its FY16 NIM guidance of 15-20bps lower.

• Overheads were the only bright spot. Continued cost efficiency will be partly offset by investment for growth and regulatory costs but FY16 run rate will be slower than the underlying 9.3% yoy contraction in 1Q.

• Asset quality (AQ) trend mixed. Although absolute amount continued to decline, IL ratio deteriorated chiefly due to contraction in loan base. Credit cost was only 1bps in 1Q but management guiding for 20bps for FY16. Overall AQ still intact while collection remained robust.

• Thus, although FY16 ROE KPI of 12-12.5% is intact, we believe it is a tall order given weak 1Q ROE of 9.3% coupled with depressed NIM, single-digit loans growth and subdued capital markets.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and impact from lower capital markets activities.

Forecasts

• FY16-18 forecasts cut by 17.7-18.2% to reflect lower NIM and NOII.

Rating

HOLD

Positives

• Value propositions from ANZ have improved asset quality and risk management. Recent mergers and life insurance partnership to enhance long-term recurring noninterest income.

Negatives

• Still searching for new leader, high LD ratio, relatively high earnings sensitivity to capital markets and slow asset growth arising from portfolio rebalancing towards lower risk segments.

Valuation

• Maintain Hold with lower target price of RM5.25 (post earnings forecasts cut) based on Gordon Growth (ROE of 9.9% and WACC of 9.7%).

Source: Hong Leong Investment Bank Research - 20 Aug 2015