Results

• Missed our expectation. 4Q15 core net profit of RM316.1m (qoq:-25.8%; yoy: -35%) took FY15 core net profit to RM1,743m (-14.5%), below our expectation, accounting for only 88.6% of our forecast. Against the consensus, the results came in within market expectations, accounting for 96.9% consensus forecast.

Deviation

• Lower-than-expected loan growth (6.2% vs. 6.9% we projected) and Islamic income, and higher-than-expected credit cost (23bps vs. 20bps we projected) and CIR.

Dividends

• Declared 12 sen interim DPS, in line with our projection.

Highlights

• Against FY15 KPI targets… FY15 normalised ROE of 8.3% fell short of management’s guidance of 11.5%, on the back of lower loan growth (6.2% vs. 10% guided earlier) and higher CIR (56.3% vs. 51% guided earlier).

• Adjusted NIM declined by 10bps to 2% in FY15. Management guided that NIM will remain under pressure in FY16, due to competition for deposits.

• Asset quality. Both absolute IL and GIL ratio declined by 1.8% and 15bps to RM2,841m and 1.88% respectively. Loan loss provision and credit cost, on the other hand, increased by 65% and 7bps to RM340.3m (from RM206.2m in FY14) and 23bps respectively, mainly on the back of higher IA (which in turn was due largely to lumpy provisions for 2 customers in the steel industry), and the absence of lumpy one-off recoveries. Credit cost is guided to increase to 40bps in FY16 (on the back of weak economic activities).

• Announ ced FY16 KPI s… Targeting ROE of 10%, loan growth of 8%, GIL ratio of less than 2%, CASA growth of 8% and overseas profit contribution of 10%. Higher FY16 ROE target is underpinned mainly by cost savings.

Risks

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

Forecasts

• FY16-17 net profit forecasts adjusted downward by 1.5- 3.5%, as we tweaked our assumption parameters, in line with management’s guidance.

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 lower TP of RM6.96 (from RM7.18 previously, based on Gordon Growth with ROE of 8.8% and WACC of 9.4%).

Source: Hong Leong Investment Bank Research - 29 Feb 2016