Results

• 3Q15 net profit of RM102.4m (-26.5% qoq; -29.1% yoy) took 9M15 net profit to RM271.9m (-31.1%), below expectations, accounted for 64-65.7% of our and consensus full-year forecasts.

Deviations

• IA remained elevated, with gross IL ratio increasing further to 2.2% (highest since 2Q13).

Dividends

• Declared dingle-tier DPS of 2.99 sen (ex-date: 16 Dec 15; payment date: 30 Dec 15).

Highlights

• Although loans growth was flattish (at 0.4% qoq vs. a qoq growth of 3.8% in 2Q15) and higher NIM (which expanded to 1.7% from 1.4% in 2Q15), 3Q15 net profit declined by 26.5% to RM102.4m mainly on the back of lower Islamic income, higher loan loss provisions (arising from CA normalization), lower non-interest income, and higher overhead expenses.

• Deposit resumed on a downtrend, declining by 6.7% qoq (vs. +1.9% in 2Q15), while loans growth slowed to 0.4% qoq (from 3.8% in 2Q15), resulting in LDR increasing further to 90.2%, highest since 4Q02.

• Asset quality (AQ) deteriorated further, with absolute impaired loans (IL) amount rising by 8.8% to RM937.5m (worst since 4Q11). IL ratio deteriorated to 2.21% (vs. 2.04% in 2Q15), worst since 2Q13. Despite IA easing by 17.8% qoq to RM64.1m, provision in 3Q15 more than doubled to RM29.7m (from RM13.7m in 2Q15) and this was due mainly to CA normalization (recall, provision in 2Q15 was helped mainly by RM55.3m CA write-back).

Risks

• Unexpected jump in impaired loans, lower loan growth and intense competition from much bigger peers.

Forecasts

• Maintain for now, pending further update with management.

Rating

• HOLD

Positives

• Tier-1 capital purely equity while acquisition of Hwang enhanced its market share in broking;
• Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa half of the next largest bank, AMMB.

Negatives

• Investors’ perception and its delinquency track record.
• Lowest NIM and ROE in industry, low deposit franchise (CASA only circa 20% of total) and one of the highest percentage of fixed rate loans.
• Short-term drag and dilution from acquisition of Hwang (transaction and integration costs) and the subsequent rights issue to fund the acquisition.

Valuation

• Maintain Hold and target price of RM1.96 based on Gordon Growth (ROE at 7% and WACC at 9.3%) for now.

Source: Hong Leong Investment Bank Research - 30 Nov 2015