Period

2Q15/1H15

Actual vs. Expectations

2Q14 net profit of RM58.1m brought 1H15 net profit to RM107.7m.

This is slightly below expectations, accounting for 46% and 41% of our forecast and street numbers, respectively.

Dividends

No dividend was declared, as expected.

Key Results Highlights

1H15 vs 1H14, YoY

1H15 net profits declined by 51.1% with all income segments registering contraction with Islamic Banking Income (IBI) contracting 1.8% whilst Net Interest Income (NII) and Non- Interest Income (NOII) declined by 14.2% and 32%, respectively.

The severe decline in net profit was further exacerbated by higher non-interest expense at 8.4% and higher collective impairments of RM235m (FY1H14: nil).

Loan-to-deposit ratio added 2.4ppts to 111.8% as gross loans (+4.1% YoY) outpaced deposit growth (+1.9% YoY).

Annualised Credit cost was much higher to 1.4% (FY1H15: nil), thus pushing coverage up to a healthier 80.9%. (Management’s target is 100%).

Meanwhile, annualised return on equity (ROE) continued to deteriorate, dropping 13.2ppts to 8.7%.

Coupled with the larger share base (on on-going shares issuances pursuant to the Group’s ESOS), earnings per share dropped by 57.1%.

Meanwhile, gross loan-deposit (LD) stood higher at 112% (+9.4ppts) as loans growth of 4.1% outpaced deposits growth of 1.9%.

On the upside, asset quality slightly improved (gross impaired loans ratio (GIL): -58bps), while credit cost was much higher to 1.4%), thus pushing coverage up to a healthier 80.9% (management’s target: 100%). 2Q15 vs. 1Q15, QoQ

2Q15 net profit registered a lower decline, plunging 31.2% despite a 17% increase in NII. The increase in NII was offset by contraction in IBI (-2.6%) and NOII (-30.4%).

The decline in net profit was stretched further by higher impairments by 32% to RM134.3m and rising tax rate by 12.7ppts to 33.8%.

Cost-to-Income ratio (CI), however, improved 2.3ppts to 22.2% while NIM continues its downward trend to contract by 16bps to 3.4%.

Outlook

Management expects 2H15 to be as challenging, thus is reviewing its business targets and projections. Management is seeing distress in some of the retail segments.

Among its targeted growth areas are equipment financing and bridging financing (National Housing projects).

The Group plans to focus on growing its corporate loans with corporate loans composition at 13.1% of total loans in 2Q15 compared to 9.7% a year ago.

At the same time, it is also focusing on prudential measures and adoption of improved standards of impairments.

Its aspiration to be an Islamic Bank is still on although it is currently not engaged in any negotiations with respect to acquisition or merger.

Most of the components to become an Islamic Bank are in place as most of its retail products are already Islamic.

Change to Forecasts

FY15/16E earnings slashed slightly by 5/1.3% to accommodate the Group’s impairment programme which we understand will see two years of elevated credit cost. We have assumed 1.5/1.3% for FY15/16E (vs. FY14: 0.4%).

Rating

Maintain UNDERPERFORM

Given the magnitude of the impairments due to stringent measures and the challenging environment, downside potential is apparent.

Valuation

For now, the target price reduced to RM1.76 (from RM1.78), as we rolled over our valuations to FY16. This is based on a blended 1.3x FY16 P/B and 6.5x FY16PE. The higher PB is to reflect the expected higher earnings for FY16 given the expectations of lower credit cost at 1.3%.

Risks

Capital raising activities which could dilute ROE.

Potential corporate exercises or M&As.

Slower-than-expected growth in household lending.

Higher credit cost arising from faster-than-expected deterioration in asset quality or lower disposable income.

Source: Kenanga Research - 7 Aug 2015