Results

• 1Q16 net profit of RM1.43bn (qoq: -13.6%; yoy; -16.1%) came in below expectations, accounting for only 21.3% and 20.3% of consensus and our full-year forecasts.

Deviations

• Higher-than-expected credit cost.

Dividend

• -

Highlights

• QoQ… Adjusted for RM158m property disposal gain, 1Q16 net profit declined by 4.5% to RM1.4bn arising from slightly lower net interest income (arising from 3bps NIM compression amidst 5.7% loan growth) and higher provisions (arising from a reversal in CA and lower recoveries, which altogether more than offset lower IA).

• Loans contracted by 3.9% qoq, as all 3 major markets (Malaysia, Singapore and Indonesia) recorded loan contractions. The qoq contractions in loans and deposits (by 0.9%) have resulted in LDR declining to 88.6% (from 91.5% in the previous quarter).

• Asset quality deteriorated on qoq basis… with absolute IL and GIL ratio increasing by 9.1% and 25bps qoq to RM9.34bn and 2.11% respectively, mainly on the back of new impairment on corporate and business banking borrowers in Malaysia. There were newly impaired accounts in Singapore being identi fied as high risk sectors, despite some of them are performing (comprising mainly shipping, O&G and manufacturing sectors). Asset quality in Indonesia, on the other hand remained stable.

• While keeping to its FY16 KPI targets… management has turned more cautious on Singapore, as it has guided down loan growth target in Singapore by 2%-pts to 1-2%, while highlighted that asset quality there may deteriorate further.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and significant slowdown in capital market.

Forecasts

• FY16-17 net profit forecasts are tweaked lower by 5.3% and 0.6% to RM6.67bn and RM7.53bn respectively, large to account for higher credit cost assumptions.

Rating

• BUY

• Positives – Improving domestic operations and expanding regional footprint, new divisions to better address competition and customer centric and new IB outfit gaining traction. DRP provides downside protection while giving additional boost (from the discount pricing of DRP) to industry leading dividend yield.

• Negatives – DRP will drag ROE, deterioration in Indonesia asset quality (but BII is only a small contributor of profit ) and drag from subdued capital markets.

Valuation

• Post earnings adjustments, Gordon Growth-derived target price lowered by 5% to RM9.33 (based on ROE and WACC of 10.7% and 9%). Maintain BUY.

Source: Hong Leong Investment Bank Research - 30 May 2016