Period

4Q15/FY15

Actual vs. Expectations

4Q15 net profit (NP) of RM93.3m brought FY15 NP to RM530.8m. This met our expectation, accounting for 96% of our full-year forecast while lagging street numbers at 93%.

Dividends

Declared dividend of 6.4 sen, bringing full FY15 dividend to 15.4 sen (44% payout), which is below our expectation of 21 sen (59% payout).

While the Group’s dividend policy stipulates payout of up to 60%, past payouts suggests that 50% and below would be a more realistic expectation. As such, we have trimmed our FY16E to 47% payout at18.0 sen.

Key Results Highlights

YoY, FY15 NP declined 5.8% despite total income gaining 2.5% on higher net interest income (NII) (+11%; notwithstanding margin slipping 8bpts) and Islamic banking income (IBI) (+6%). Non-interest income (NOII), on the other hand, retraced (-6%).

The decline was attributable to a significant rise in collective assessment allowance (+566%) on changes in estimate made pursuant to MFRS139, causing the incurrence of loan provision amounting to RM39.6m vs. a write-back of RM13.6m in FY14. Cost-income (CI), however, held steadily.

Excess liquidity was little changed with gross loandeposit (LD) ratio increasing by a marginal 71bpts to 82.9% (industry: 81.6%) as loans growth of 14.7% (industry: +9.2%) just slightly outpaced that of deposits’ 13.7% (industry: +9.0%).

Asset quality improved as gross impaired loans ratio dropped 34bpts to a very healthy 1.03% (industry: 1.63%). Nevertheless, credit cost of 11bpts was incurred this FY15 (as opposed to a 4bpts write-back in FY14). Consequently, coverage was propelled pass the 100%-mark at 103% (+10ppts) (industry: 98.7%)

QoQ, 4Q15 NP loss 26.2% due in part to a fall in total income by 12.5% with NII (-6%, as NIM fell 6bpts), and NOII (-21%) recording sequential decreases, while IBI was flat.

A larger decline was seen at the bottom-line, mostly due to a higher CI of 54.1% (+9ppts) as operating expenses continued to grow.

Outlook

Loans growth should slow to the high single-digit reflecting the tougher lending environment as well as management’s adoption of a more selective approach to origination (our assumption: +8.7%).

However, we are expecting a rebalancing in the Group’s portfolio in favour of higher-yielding assets. Hence, growth in NII may still see some acceleration. We are expecting growth of 6% vs. FY15: 5%.

Management also intends to build on its strength in deposit growth to elevate its LD ratio. Assuming 9.5% deposits growth, we are expecting the LD ratio to remain flat, at the very least.

We are also anticipating for the Group’s provisioning to remain elevated (as opposed to write-backs reported in the past) due in part to the new guidelines on restructured and rescheduled loans. Our credit cost assumption is 10bpts in FY16 reflecting that of FY15.

Moving forward, one area of focus is expected be on building the wealth management segment and leveraging on business clients for ‘flow business’ which could increase fee income. As such, NOII could advance in FY16 vs. the 6% decline reported in FY15 (our assumption: +16%).

Change to Forecasts

Taking into account FY15A numbers which came in at the lower end of our forecasted earnings (ie. 96%), we tweak FY16E downwards by 2%.

We also introduced FY17E estimates.

Rating

Maintain MARKET PERFORM

As the Group embarks on the fine-tuning of its operations and rebalancing of its portfolio under the watch of its new chief, we are expecting a move away from dependence on high-volume but low-margin assets in favour of higher-yielding riskpriced assets. The flipside of this is that loans growth could moderate at lower levels, at least for the interim period. MARKET PERFORM maintained.

Valuation

Target Price (TP) lowered to RM4.70 (from RM4.97), based on a reduced blended FY16E Price-Book (PB) / Price- Earning (PE) ratio of 1.5 / 12.0x (from 1.7 / 12.7x) reflecting our assumption of a more conservative ROE of 12.2% (from 13.2%) and our toned-down loans growth expectation of 8.7% (from 11.4%).

We arrive at our PB ratio based on the historical PB ratio achieved of 1.5-1.6x when ROE hovered about 10-13%. Meanwhile, the PE ratio is 1-stdev below the Group’s historical 5-year average PE ratio.

Risks

Tighter lending rules.

Further margin squeeze in general.

Slower progress in building up NOII.

Source: Kenanga Research - 28 May 2015