Period

1Q15

Actual vs. Expectations

1Q15 net profit (NP) of RM30.1m was below expectations, making up a mere 5% of our, and consensus, full-year forecasts, owing to a surge in loan provisioning.

Dividends

No dividend declared, as expected.

Key Results Highlights

YoY, 1Q15 NP plunged 79% despite a robust 21% advancement in total income to RM449m buoyed by strong advancement in non-interest income (NOII) (+80%). Islamic banking income (IBI) also recorded good growth (+10%), while net interest income (NII) slipped (- 2%) given an est. 23bpts compression in net interest margin (NIM).

The hefty decline in NP was caused predominantly by large increases in both individual (+105%) as well as collective allowances (+339%), which was attributable to the Group’s commercial banking operations. Consequently, loan provisioning spiked to RM124m (vs. a RM6m write-back in 1Q14). Cost-income (+11ppts) and effective tax (+5ppts) were also higher.

Gross loan-to-deposit inched up 50bpts to 83% as gross loans growth (+6%) outpaced deposits’ (+5%). Meanwhile, current and savings accounts composition dropped to 20% (-2ppts).

Asset quality slightly deteriorated (gross impaired loans (GIL): -4bpts) while credit cost came in at a steep 1.2% (vs. write-back of 0.07% in 1Q15). Coverage also registered a drop to 68% (-8ppts).

QoQ, 1Q15 NP plummeted by a larger 86%, due in part to lower sequential total income (-6%) dragged down by a smaller NII (-13%, notwithstanding an est. 25bpts drop in NIM and a 1% decrease in gross loans) and IBI (-9%). NOII (+6%), however, managed to grow gain.

Declines were larger at the bottom-line owing to the chunky loan provisioning this quarter (vs. a RM52m writeback in 4Q14), and a higher CI (+9ppts) and effective tax (+3ppts).

Outlook

Given the spike in loan provisioning, it may be an uphill climb to meet the 2015 aspirations announced last quarter.

For return on equity (ROE) (1Q15: 1.5% annualised) and return on asset (ROA) (1Q15: 0.2% annualised), we have assumed a more conservative 7.0% and 0.8% respectively (vs. internal targets: 8.0% and 0.9%).

As for GIL ratio (1Q15: 1.96%), we have imputed a slightly elevated 1.75% into our forecast vs. target: 1.64%.

Earnings per share (EPS) (1Q15: 1.55 sen) could also come in lower than the 33.0 sen aspiration. Conservatively, we are expecting EPS to register at <30 sen.

NIM should also resume on it’s downwards trajectory on the ongoing harsh competition for deposits and more restrictive lending environment.

Change to Forecasts

FY15/16E earnings revised downwards by 12/7% to account for the large loan provisioning this quarter.

While we understand that the spike is one-off, should credit cost remain elevated in the coming quarters, our earnings forecast stands the risk of being further reduced.

Rating

Downgrade to UNDERPERFORM (from MARKET PERFORM)

Valuation

Consequent to our lower earnings expectation, we reduce our target price (TP) to RM2.74 (from RM3.07) by applying a lower FY15 price-book (PB) / price-earnings (PE) ratio of 0.7/ 8.6x.

The PB ratio reflects our decreased ROE expectation of 7% (from 7.9%) and is based on the group’s historical share price performance which traded in the range of 0.5-0.9x PB ratio when ROE was hovering around 6.5-8%, whereas the PE ratio represents the Group’s average 3-year historical PE ratio.

Risks to Our Call

Improvements in asset quality and lower credit costs.

More relaxed lending rules and higher loans growth.

Easing of competition for deposits and reversal of NIM compression.

Source: Kenanga Research - 21 May 2015