Results

• 3Q15 core net profit of RM902m (excludi ng Indonesia’s MSS cost and tax and MI of RM134m and RM36m respectively; +2.9% qoq; +1.3% yoy) took 9M15 core net profit to RM2,561m (-11.9%) beat our expectation, accounted for 80.4% of our full-year forecast. The results came in within market expectations, accounted for 75.7% of consensus full-year estimate.

Deviation

• Lower-than-expected tax expense arising from MSS.

Dividends

• None.

Highlights

• Netting off non-recurring expenses (related mainly to MSS costs), 3Q15 core net profit increased marginally by 2.9% qoq to RM902m. This was driven by a 6.4% qoq loans growth and a slight improvement in NIM but partly offset by lower Islamic income and NOII. Excluding MSS costs, overhead expenses were flattish on qoq basis.

• Asset quality continued to deteriorate, evidenced by higher NPL (in absolute terms) and lower loan loss coverage, due to forex translation, the challenging envi ronment faced by Niaga, and seasonal factors. Provision will likely remain elevated in 4Q (given the challenging envi ronment, particularly, in Indonesia).

• 9M15 cost income ratio (excluding MSS and IB restructuring cost) declined to 56.2% from 57.8% year ago, indicating that savings from MSS exercise has already kicked in. Nevertheless, full-year impact would only be felt from 2016 onwards.

Risks

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

Forecasts

• FY15 net profit forecast raised marginally by 2.7% to RM3,269.5m, mainly to account for a lower effective tax rate assumption. No change in our FY16-17 net profit forecasts.

Rating

• Trading Buy 

Positives

• Proxy to economic growth and capital markets as well as 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 5.52 based on Gordon Growth with ROE of 11% and WACC of 10.4%. We upgraded our recommendation on the stock from HOLD to T.BUY, as we believe valuation has become more compelling following recent share price underperformance.

Source: Hong Leong Investment Bank Research - 26 Nov 2015