Results

• 1Q16 net profit of RM115.6m (yoy: +284.1%; qoq: +18.6%) came in below our expectation, accounted for only 21.8% of our full-year forecast. Against consensus, the results accounted for 25.4% of consensus full-year forecasts.

Deviations

• Weaker-than-expected loan growth (0.8% vis-à-vis 7.5% we projected), NIM and NOII.

Dividends

• None.

Highlights

• 1Q16 net profit increased by 18.6% qoq to RM115.6m, mainly on the back of 0.8% loan growth, provisions writeback of RM1.6m (vs. provisions of RM20.8m i n 4Q15), lower overhead expenses, and earnings from associate. All these more than offset lower NIM (which declined by 22bps to 1.75% amidst lower Islamic income and lower interest income yield) and lower NOII (which in turn was dragged by lower fee income and MTM derivative losses).

• QoQ loan growth decelerated to 0.8% (from 3.6% in 4Q15), while deposits declined by 1%, resulting LDR rising to 87.3% (from 85.7% in 4Q15).

• Asset quality deteriorated on qoq… with absolute IL and GIL ratio increasing by 5% and 8bps to RM875.8m and 1.98% respectively. The increase in IL came largely from the property (both residential and non-residential) and transport vehicle segments. Registered credit cost of -0.4bps (vs 4.8bps in 4Q15) and this was due mainly to lower IA (which more than offset lower recoveries).

Risks

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

Forecasts

• FY16-17 net profit forecasts lowered by 18.3% and 21.6%, largely to account for: (1) Lower loan growth assumption of 5.5% and 6% (vs. 7.5% previously); and (2) Lower NOII assumption.

Rating

SELL

Negatives

• :
• Investors’ perception and its delinquency track record.
• Lowest NIM and ROE in industry, low deposit franchise (CASA only 19.2% of total deposits in FY15) and one of the highest percentage of fixed rate loans.

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.

Valuation

• Target price lowered to RM1.74 (from RM1.75) based on Gordon Growth (ROE of 5.1% and WACC of 8.3%), as we lower our FY16-17 earnings forecasts and fine-tune our valuation parameters. Maintain SELL recommendation.

Source: Hong Leong Investment Bank Research - 25 May 2016