Period

3Q15/9M15

Actual vs. Expectations

CNP of RM271.9m is within our expectations accounting for 77%of our full-year estimates. However, the reported 9M15 earnings only made up 63% of consensus estimate.

Dividends

An interim dividend of 2.99 sen/share was declared, which is lower-than-expected from last year’s interim dividend of 15.0 sen/share.

Key Results Highlights

9M15 vs. 9M14, YoY

CNP was down by 29.2% brought about by higher loan loss provisions of RM165.9m (+368.1%) and higher opex of RM801.4m (+7.2%).

Total income went up by 1.4% with growth from Islamic banking (+12.5%) and NOII (+3.3%) but mitigated by drop in NII at -2.5%.

NIM dropped by 1bps to 1.88%.

CIR deteriorated by 3.2ppts to 59.1% (vs industry’s CIR of 49.2%) as establishment and marketing costs increased by 33.3% and 14.6%, respectively.

Loans grew by 7.0% but deposits declined 13.2%, resulting in LDR surging by 17.2ppts to 91.4% (above the industry ratio of 85.4%) vs our loans & deposit growth of 7.5% and 5.0% respectively.

Loans growth was driven mostly by loans to purchase non-residential assets and working capital. The drop in deposits was mainly from lower business enterprises and individual deposits, which dropped 11.2% and 8.8%, respectively. CASA grew by another 70bps.

Asset quality deteriorated with GIL ratio added another 30bps to 2.21%. Credit cost was up by another 41bps to 0.53% (we were expecting 0.67%).

CET1 and CAR fell by 12bps and 5bps to 12.2% and 13.5%, (after deducting proposed dividends) but still above the regulatory requirements of 7% and 10.5%, respectively.

ROE was merely recorded at 4.5% (vs. our forecast of 4.4%), which is below the industry average of 9.3%. 3Q15 vs. 2Q15, QOQ

On a quarter to quarter basis, CNP fell 26.5%, dragged by higher loan loss provisions of RM29.7m (2Q15: RM12.1m) and higher tax rate of 30.1%.

NIM improved by 23bps to 2.04 as Cost of Funds contained.

Loans growth was slower at +0.5% (2Q15:+3.9%) whilst deposits growth declined 6.7% (2Q15:+1.8%) forcing LDR to increase by 6.5ppts to 91.4%. However, CASA was up by 1.6ppts.

Asset quality did not improve as GIL ratio was at 2.21% (2Q15:2.04%). Credit cost was also up by 17bps to 29bps (from 12bps a quarter ago).

Outlook

Judging from the weaker set of results, we maintained our cautious stance. Besides, we believe NIMs will be compressed as the Group intensify its funding resulting in higher funding costs. Credit costs will also trend higher as NPL heads north due to the challenging economy.

As such, we maintained our cautious assumptions in our forecasts:-

Total loan growth: Unchanged. We imputed 7.5% growth for the next two financial years.

Customer deposit growth: Unchanged. We factor in a 5.0% in deposit growth for FY15E and 6.0% for FY16E.

NIM: Unchanged. At 2.2% for FY15E/FY16E.

CIR: Unchanged at 55% for both FY15E and FY16E.

Credit charge ratio: 67 bps for FY15E but 32bps for FY16E (as loan loss provisions could have peak by then).

Change to Forecasts

As the results were within our expectations, we made no changes to our forecasts with CNP for FY15E and FY16E at RM352m and RM529m, respectively.

Rating

Maintain UNDERPERFORM.

Valuation

We reduce our target price (TP) to RM2.17 (from RM2.40) based on a blended FY16E price-book (PB)/ priceearnings (PE) ratio of 0.5x / 7.9x (previously PB/PE of 0.5x/9.0x).

The lower PB ratio reflects weakening ROE 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%-8.0%, whereas the PE ratio represents the Group’s average 5-year’ historical PE ratio with a -0.5 Standard Deviation.

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 - 30 Nov 2015