Results

• Excluding one-off CTS expenses, 3Q15 core net profit of RM426.8m (qoq: -18.6%; yoy: -21.6%) took 9M15 core net profit to RM1.43m (-8%). The core net profit met expectations, accounting for 72.6 and 77.5% of our and consensus full-year forecasts.

Deviation

• Broadly in line.

Dividends

• None.

Highlights

• Annualised ROE of 9.6% (net of one-off CTA expenses) was behind FY15 target ROE of >11.5% but in line with our 10% projection. Nevertheless, management is still keeping to its ROE target.

• Although net interest income registered a qoq increase of 6.8% (backed by 3.5% loans growth, NIM expansion and higher Islamic income), 2Q15 core net profit declined by 18.6% qoq to RM426.8m, on the back of lower non-interest income, higher loan loss provisions and a slight increase in overhead expenses.

• NIM improved by 11bps qoq but compressed by 10bps yoy. While NIM will likely remain under pressure, management highlighted that it will unlikely experience a huge compression.

• Loans growth expanded by 3.4% in 3Q15 (from 0.8% in 2Q15), while deposit growth resumed on uptrend (with qoq growth of 1.15), resulted in LDR increasing to 93% (from 91% in 2Q15).

• Asset quality improved, with absolute impaired loans declined by 1.8% qoq to RM2.9bn, while impai red loans ratio declined to 1.94% (from 2.05% in 2Q15). Loan loss provisions reversed to RM96.3m (from a write-back of RM40.8m in 2Q15) was due mainly to the normalization of Individual Allowance.

Risks

• Unexpected jump in impai red loans and lower t han expected loan growth as well as impact from Basel III.

Forecasts

• Maintained. In our FY15 net profit forecast, we are projecting ROE of 10% vs. annualized 9.6%. .

Rating

BUY

Positives

• Valuations still lagging behind; OSK merger and IGNITE 2017 transformation already bearing fruits; Bank@ Work; Rights issue and reorganization will enhance tax efficiency, eliminate goodwill, enhance interest savings as well as higher ROE and capital ratios; new reframed strategy to focus on performance and profitability.

Negatives

• Low liquidity, ROE at lower end among peers and EPS dilution from rights issue.

Valuation

• Maintain BUY with unchanged TP of RM7.53 (Gordon Growth with ROE of 9.9% and WACC of 10.2%), as valuation still lagged peers and below book.

Source: Hong Leong Investment Bank Research - 1 Dec 2015