Period

4Q15/FY15

Actual vs. Expectations

FY15 net profit of RM5.06b was above estimates making up 106%/107% of our/consensus estimates, attributed to better loan growth, stronger non-interest income and lower-thanexpected credit costs. However, after stripping off the RM107m gain on asset revaluation, net profit is RM4.95b, accounting for 104%/105% of ours/consensus estimates.

Dividends

As expected, a second interim DPS of 32.0 sen was declared bringing total DPS to 56.0 sen for FY15 (FY14: 54.0 sen) implying a payout ratio of 43% (FY14: 46%).

Key Results Highlights

FY15 vs. FY14, YoY

FY15 net profit advanced 12.0% (FY14: 11.2%) on the back of: (i) stronger non-interest income (NOII) of 22.4% (FY14: +9.2%), and (ii) lower allowances for impairment by 43.2% (FY14: - 26.5%).

Non-interest income was robust with stellar performances from: (i) forex income up by 32.2% (15.2% contribution to non-interest income), and (ii) 19.9% increase in fee & commission income (29.7% contribution to non-interest income).

Net interest margin (NIM) saw another 8bps compression to 2.16% (FY14: 12bps compression) attributed to upward pressure on funding costs.

Loans and deposits showed resilient performances at the Group level with growth of 11.6% and 8.9%, respectively (2014: +10.8% and +8.9% respectively (vs. industry loan and deposit growth of +7.9% and +1.8% respectively). In terms of purely domestic growth, loan and deposits came in at +10.5% and +9.9%. Note that loan growth was above our estimates and management target of 10%. With stronger loans growth, LDR came in at 90.8% (FY14: 88.6%).

Current account and Savings account deposits (CASA) rose 5.6% (FY14: +7.9%) making up 24.2% of total deposits (FY14: 25.0%).

Cost-to-income ratio (CIR) up by 50bps to 30.5% (vs. industry average of 45.5%) as opex outpaced total income by 1.8ppts at +11.9%.

Asset quality improved as gross impaired loans ratio fell by 10bps to 0.5% (vs industry average of 1.6%). Credit charge ratio fell by 5bps to 0.06%. Improved recovery rate led to lower collective assessment allowance. Loan loss coverage stayed above 100% at 120.8% (vs. the industry’s 96.2%).

Annualised ROE improved by 1.3ppts in tandem with the strong growth in net profit.

CET1 and Total Capital Ratio improved by 11- 15bps on higher retained earnings.

4Q15 vs. 3Q15, QoQ

Net profit surged by 24.2% primarily due to writebacks in loan loss provisions of RM105.7m. Total income grew only by 1%, led by increase in Net interest income (NII) and NOII of 1.1% and 1.6%, respectively.

NIMs advanced by 3bps to 2.19%.

Loans growth of 2.0% outpaced deposits by 40bps leading LDR to inch up by 30bps to 90.8%.

CIR was flat at 30.0% as opex and total income inched up by 1.0% and 1.1% respectively.

GIL was flat 0.5% but LLC fell by 10ppts.

Outlook

Leading indicators for 2016 loans growth remains weak and we are only expecting system loans to expand by 5%-6% YoY this year (vs. 2015: +7.9% YoY). Furthermore, the industry’s relatively high LDR of over 93% makes bank lending more difficult than usual. As for asset quality, further deterioration is expected given external and internal headwinds prevailing with credit costs facing upward pressure. NIMs downward pressure is likely to persist on the back of stiff price-based competition for loans and deposits.

Based on management’s guidance for FY16 and our conservative views, we tweaked our forecasts for FY16 and introduce FY17 numbers: (i) We lowered our ROE assumption by 90/110 bps to 15.3%/14.2% for FY16/17 (Management’s guidance for FY16: above 15%). (ii) We maintained loans growth of 9%/9% for FY16/FY17 (Management for FY16: 8%-9%) (iii) We lower deposits growth by 2ppts to 7% for FY16 and maintained 7% for FY17 (Management for FY16: 7-8%) (iv) We maintained NIM at 2.10% (6bps compression) for FY16 and another 5bps in FY17(Management for FY16: +/- 8bps) (v) We revised upwards our to Credit charge ratio to 15bps from 13bps previously and for FY17 15 bps (Management for FY17: 15bps – 20bps and (vi) Maintained CIR of between 31% and 32% for FY16/FY17(Management: less than 33%.

Change to Forecasts

Based on the revised assumptions our FY16/FY17 earnings are lower by 3%/6% to RM4,832m/RM4758m.

Rating

Maintain MARKET PERFORM

We maintained our call due to the uncertain economic challenges ahead.

Valuation

We lowered our TP to RM19.23 (from RM20.00 previously). This is based on a blended 2.43x FY16E P/B and 14.9x FY16E P/E (previously 2.5x FY15 P/B and 15.0x FY15 P/E). The lower P/B and P/E multiples are to reflect slower growth and weaker ROE generation moving forward.

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Source: Kenanga Research - 4 Feb 2016