Highlights

• We attended a group meeting with management yesterday and below are the main salient points.

• While the asset quality in Thailand operations is expected to improve by year-end, management expects asset quality in Indonesia for 2016 to remain fluid (with lower provisions, on yoy basis). Asset quality remains intact in Malaysia, in particularly for the SME and corporate segment. While there are signs of some deterioration at retail segment (given the macro picture), it may be premature to conclude due to seasonal factors. Nevertheless, with IL and provisions already at such low levels, there is limited room for improvement.

• The extensive stress test (based on certain extreme scenarios, including crude oil and CPO price assumptions of US$30/barrel and RM1,300-1,500/mt, as well as US$ assumption of RM5:US$1) suggests that provisions will not skyrocket to crisis level. It would only hit its CET1 ratio by 50-150bps, based on different extreme scenarios.

• Despite recent renewed deposit competition, the group is in comfortable position. However, the pressure will likely reemerge by year-end, on the back of seasonal year-end rush for deposits, coupled with the need to comply with higher LCR from 60% currently to 70% by Jan-16.

• Non-interest income to remain subdued, with small MTM loss from bond market to be offset by improved performance from FX market.

• Given the recent turn of event, management is reviewing T18 initiative from 2 angles: (1) The achievability of its ROE target of 15%; and (2) Suitability of and level of aggressiveness of various and/or new drivers.

Catalysts

• Gaining more traction in cost rationalization or T18 initiatives, better than expected non-interest income growth, turning into an APAC universal bank and more active capital management.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

• Unchanged, pending results scheduled for 25 Nov.

Rating

HOLD

Positives

• - Proxy to economic growth and capital markets as well as growing regional universal bank platform, new core banking system (1Platform) and new T18 initiatives.

Negatives

• Impact on non-interest income when capital markets soften, impact of asset quality deterioration in Indonesia and legacy high cost structure.

Valuation

• Target price maintained at RM5.52 based on Gordon Growth with ROE of 11% andWACC of 10.4%.

Source: Hong Leong Investment Bank Research - 22 Oct 2015