Period  3Q15 / 9M15

Actual vs. Expectations 3Q15 net profit of RM48.3m brought 9M15 net profit to RM152.0m.

 This came in below expectations and accounted for only 68% of our full-year estimate, as impairment loss provision was beefed up by a large 40% during the quarter.

Dividends  No dividend was declared since our last results note (last year: 22.3 sen) given that dividend amounting to 27.4 sen was declared just last quarter.

 Given our assumption of a full year dividend of 55 sen (38% payout), we are anticipating a second and final dividend of c.27.6 sen to be declared in the next few months.

Key Results Highlights YoY, 9M15 net profit grew 19.2% on the advancement in total income by 28.5% to RM568.9m. Both net interest income (NII) (+31.2% to RM446.9m) and non-interest income (NOII) (+46.6% to RM40.0m) reported gains.

 Nevertheless, growth at the net profit level decelerated mainly due to higher impairment loss provision on financing receivables which jumped to RM167.6m (+57.3%). There was continued deterioration in asset quality with non-performing loans ratio coming in at 3.1% (+1.1ppts). Meanwhile annualised credit cost ratio edged higher at 5.28% (+85bps), signalling potential further deterioration. Annualised return on equity (ROE), on the other hand, loss 49bps to 33.1% on fatter reserves of RM494.0m (+18.3%).

 QoQ, 3Q15 net profit increased by a slight 1.8% as total income increased 3.9% to RM195.5m supported by growths in NII to RM154.0m (+3.2%) and NOII to RM14.2m (17.6%). An increase in the CI ratio to 35.2% (+58bps), however, caused growth to slow at the net profit level.

Outlook  Given the pull-back in subsidies, higher interest rates and the impending implementation of the goods and services tax (GST), we are expecting further deterioration in asset quality. Hence, we have imputed a higher credit cost assumption of between 5.3-5.5%.

 Meanwhile growth in net financing receivables should hover at a lower level of c.20-23%.

 Net financing margin compression is also expected to continue, and we have factored in an aggressive squeeze of ~90bps in FY15.

Change to Forecasts In view of the above, we trim our FY15/16 earnings by 7/10%.

Rating Maintain OUTPERFORM Despite the downward adjustments to our estimates, the counter still offers an attractive total upside potential of 23%. Furthermore, its dividend yield is now higher than MGS (4.26%) at 6.3%.

Valuation  Consequent to our expectation of lower earnings and ROE, we reduce our Target Price (TP) to RM12.45 (from RM17.80), based on a more conservative blended FY16 price-book (PB) ratio of 1.3x, and a FY16 price-earnings (PE) ratio of 9.3x.

 The implied 1.3x FY16E PBV is considered trough due to ROEs projected to reach a new low of 21.9% from its 5-yr range of 23%-34% where PBVs traded between 1.6x-4.1x. Our application of a more conservative FY16E PER of 9.3x reflects our expectations of receivables growth trending lower, and represents the 6 year average during which receivables growth ranged 18-55%.

Risks  Much slower growth in top-lines.

 Higher-than-expected rise in operating and credit costs.

Source: Kenanga