Results

• Above expectations. Reported 2Q16 net profit of RM137.4m (qoq: +18.9%; yoy: -1.4%) and 1H16 net profit of RM253m (+49.3%), accounting for 55.7 and 58.3% of our and consensus full-year forecasts.

Deviations

• Higher-than-expected non-interest income.

Dividend

• None.

Highlights

• QoQ… Although loan base showed a decline of 2.1% (dragged by a decline in loans for working capital purpose), 2Q16 net profit increased by 18.9% to RM137.4m due mainly to NIM expansion (which expanded by 14bps to 1.89%), higher NOII (higher fee income and MTM gains). Provisions reversed to RM2.2m from a write-back of RM1.6m in 1Q, mainly on the back of higher IA and CA, which more than offset higher write-back and recoveries.

• YoY… 2Q16 net profit declined marginally by 1.4% to RM137.4m, as higher net interest income (arising from NIM expansion and 2.6% loan growth) and lower provisions were more than offset by higher overhead expenses and higher effective tax rate.

• LDR in 2Q16 increased to 91.9% from 87.3% in 1Q16 and 83.8% in 2Q15, mainly on the back of lower deposit base (which declined by 7.1% qoq and 6.5% yoy), outpacing qoq and yoy loan growth of -2.1% and 2.6% respectively.

• Asset quality remained flat on qoq basis, with GIL remained at 1.98% and credit charge normalizing to 0.5bps from -0.4bps in previous quarter (as higher write-back and recoveries were more than offset by higher CA and IA normalization). Yoy, asset quality improved, with GIL ratio declining by 6bps to 1.98%, credit charge declining to 0.5bps from 3.3bps in 2Q15, and loan loss coverage increasing to 65.2% from 63.8% a year ago.

Risks

• Unexpected jump in impaired loans and declining loan growth. Intense competition from bigger players.

Forecasts

• FY16-18 net profit forecasts raised by 11.1%, 7.5% and 2.7% respectively, as we raised our NOII assumptions.

Rating

HOLD

• Negatives – (1) Investors’ percepti on and its delinquency track record; and (2) 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 – (1) Tier-1 capital purely equity while acquisition of Hwang enhanced its market share in broking; and (2) Potential M&A excitement given that it is one of the two remaining smallest banks with assets size.

Valuation

Post earnings adjustment, we raise our Gordon Growthderived TP to RM2.12 (from RM1.74 previously) based on ROE of 5.6% and WACC of 8.3%. Upgrade from Sell to HOLD as valuations have become more compelling post earnings adjustment.

Source: Hong Leong Investment Bank Research - 22 Aug 2016