Period  1Q15

Actual vs. Expectations 1Q15 net profit of RM130.8m broadly inline with expectations, accounting for 20.9% of our fullyear forecast (RM626.6m) and 22.0% of street numbers (RM595.5m).

 We deem this set of results to be within expectation as 1Qs are seasonally weaker.

Dividends  No dividend was declared during the quarter (vs.7.5sen in 1Q14), which is a deviation from norm.

 This is likely due to the recent special dividend in May 2014 (for FY14).

 Nevertheless, on reassurance from management, we maintain our 60% payout assumption for FY15 of 23.0 sen.

Key Results Highlights On a YoY basis, 1Q15 net profit declined 5.1% (-17.2% QoQ) in response to a 7.5% reduction in total income (-1.4% QoQ). The drag on total income was caused by a 33.9% YoY fall (-5.2% QoQ) in non-interest income on a high base effect, as the results a year ago was bolstered by a one-off RM30m sign-on fee relating to the group’s bancassurance agreement with Manulife.

 Excluding the one-off fee, total income would have come in relatively flat at +0.8% YoY, and net profit would have gained c.3.2% YoY. Nonetheless, we note that non-interest income would have still been -13.2% YoY lower.

 However, a decent 8.3% YoY growth in net interest income (-0.6% QoQ) helped cushion the decline.

 In comparison with the 15.2% YoY growth recorded in gross loans, growth in net interest income lagged due to further compression in Net Interest Margin (NIM) which slipped 14bps YoY (-9bps QoQ) to 2.11%. The compression in NIM continued to be caused by the replenishment of higher yielding Co-op loans with new lower yielding mortgage loans. A higher cost of funds of c.2.4% (1Q14: 2.3%) exacerbated the compression this quarter, as deposits were repriced ahead of the hike in the Overnight Policy Rate (OPR).

 The strong 15.2% YoY loans growth, which outperformed our estimate of ~13% and the industry’s 9.7% (as at end-May14), was mainly driven by the residential and commercial property segments (+15% and +33% YoY respectively), as well as the business banking segment (+13.5% YoY).

 Meanwhile, customer deposits grew at a slower 10.9% YoY resulting in a higher Gross Loan-to-Deposit Ratio (LDR) of 83.8% (1Q14: 80.7%, 4Q14: 82.1%). This is in-line with the group’s target to raise its LDR to 85.0% for better balance sheet management.

 Cost-to-income ratio came in flat at 48.0%, remaining within management’s guidance of 45-48% but above our 44% estimate.

 Allowance for impairment on loans was down substantially by 78.9% YoY to RM1.1m (1Q14: writeback of RM17.6m) inline with a better Gross Impaired Loans Ratio (GIL) of 1.4% (1Q14: 1.9%). This resulted in credit cost dropping to 0.5bps (1Q14: 1.9bps). The lower GIL also resulted in a higher Loan Loss Coverage (LLC) ratio of 90.2% from 84.7% in 1Q14 (4Q14: 92.7%) which is a step closer to industry’s average of >100%.

 CET1, Tier 1 and Total Capital ratios (post dividend payment) were slightly lower at 10.05%, 11.06% and 13.21% respectively (1Q14: 10.38%, 11.43% and 13.67%) without any issue as the group’s ratios have always been way above the Basel III minimum requirement of 4.5%, 6.0% and 8.0% for calendar year 2015.

 Annualised ROE registered a -0.7ppt YoY decline to 12.8% (-1ppt QoQ). This is quite a step-back from the group’s target of 14-16% and our previous estimate of 14.6%.

Outlook  We expect some softening in the consumer loans segment on tighter regulations, and as such, have factored in a more muted low-teens loans growth rate going forward.

 To counter any deceleration in consumer loans growth, especially mortgages, the group will continue to explore targeted corporate and commercial loans as well as share margin financing.

 Further compression in NIM is expected in 2Q15 on anticipation of a second hike in the OPR as the Group may potentially offer a higher fixed deposit rate ahead of the increase (as was done this quarter). However, 2H15 should see improvement in NIM inline with quicker reprising of loans as OPR increase. Given this, we still expect a mid-to-high growth in net interest income for FY15.

 As for non-interest income, judging from its flat growth trend, we reckon that it could be an uphill task to achieve the management’s target of 30% contribution to total income. We have lowered our estimates by 8.4-19.1% for FY15-FY16 hence this income stream only accounts for 20-24% of total income for FY15- FY16, respectively, as compared with 24-26% earlier.

 Going forward, we are more hopeful to see well-contained operating expenses to drive profitability. With CIR ratio now at the high end of the 45%-48% target and the group’s CIR trend for the past 2 years, we believe this is achievable. Nonetheless, with the fine-tuning in our non-interest income, our CIR estimates has revised up slight to 45%-46% in FY15-FY16 (vs. 43%-44% previously).

 Although LLC still remains below industry average of >100%, it is improving. We understand that this is the result of continuing efforts to refine the credit origination process, credit scoring models and intensify collection.

 Although it is still possible that the group will achieve its ROE target of 14-16%, we think FY15 ROE will fall at the lower end of the target at 13.9% (vs. our previous estimate of 14.6%) given our expectation of a lower growth in non-interest income growth.

Change to Forecasts  In view of the above, we have tweaked our FY15 and FY16 estimates down by -4.9% and -8.9%

respectively to RM596.0m and RM605.5m.

Rating Downgrade from OUTPERFORM to MARKET PERFORM

 We downgraded our rating inline with lower Target Price (TP) and earnings estimates.

 Besides, the stock has also gone up 9.7% since previous quarter and is now offering <6% Total Return (1% capital gains and 4.7% dividend yield).

Valuation  TP is lowered from RM5.25 to RM4.93 given our expectation of lower growth in non-interest income.

 At our revised TP of RM4.93, we basically value the stock at an unchanged PBV of 1.7x over FY15 BPS of RM2.85 and PER of 12.7x to FY15 EPS of 38.5 sen.

Risks  Tighter lending rules and further margin squeeze in general.

 The relatively low LLC ratio against the industry could be a threat to our credit cost assumptions.

Source: Kenanga