Results

• Below our expectation. 2QFY16 net profit of RM350.2m (qoq: -36.6%; yoy: -37.4%) took 1H16 net profit to RM902.2m (-12.9%), accounting for 44-48.3% of our and consensus full-year forecasts.

Deviation

• Lumpy full impairment on a corporate bond in Singapore (RM253.5m).

Dividends

• Declared interim DPS of 5 sen, translating to a payout ratio of 22.2%.

Highlights

• Against FY16 KPI s… Annualised ROE, YTD CASA growth and CIR of 10.5%, 7.2% and 49.5% met targets, while loan growth, GIL ratio and overseas profit contribution did not. Management indicated that it would not be able to meet some of these targets (i.e. loan growth, GIL ratio and overseas profit contribution).

• QoQ… 2Q16 net profit dipped 36.6% to RM350.2m, mainly on the back of 9bps NIM erosion, a lumpy full impairment on a corporate bond in Singapore (amounted to RM253.5m), and higher overhead expenses, which more than offset lower provisions.

• Impact of OPR reduction in earnings… The recent reduction in OPR will impact its earnings by circa RM20m (on full-year basis).

• LDR declined to 91.3% from 93.9% in 1Q16, as deposit growth of 4.2% (which was in turn driven by strong CASA growth of 7.1%) outpaced gross loan growth of 1.4%.

• Asset quality deteriorated in 2Q16… with GIL ratio increased to 2.05% from 1.82% in 1Q16 (as a result of a large account being classified as impaired). Provisions and credit cost, on the other hand, declined to RM59.7m and 4bps (from RM80.2m and 5.3bps in 1Q16).

Risks

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

Forecasts

• FY16 net profit forecast lowered by 9.1% to RM1.86bn, to reflect RM253m impairment on a corporate bond in Singapore.

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, and ROE at lower end among peers

Valuation

• Gordon Growth-derived TP of RM5.35 remains unchanged, as earnings revision was offset by the updated valuation parameter (i.e. beta). Maintain BUY

Source: Hong Leong Investment Bank Research - 25 Aug 2016