Period

4Q15/12M15

Actual vs. Expectations

12M15 CNP of RM271.9m is within our expectations, accounting for 105% of our fullyear estimate. However, it only made up 91% of consensus estimate.

Dividends

A final DPS of 5.0 sen/share was declared, firming up total DPS for FY15 to 8.0 sen/share.

Key Results Highlights

12M15 vs. 12M14, YoY

CNP was down by 38%, brought about by higher loan loss provisions of RM187m and higher opex at +9.2%.

Total income fell by 1% as NII shrank 2.2% but offset by growth from Islamic banking at 8.4%.

NIM was flat at 1.9% as cost of funds was contained.

CIR deteriorated by 5ppts to 60% (vs industry’s CIR of 45%) as establishment and marketing costs increased by 22% and 24%, respectively.

Loans grew by 7.0% but deposits declined 0.1%, resulting in LDR surging by 6ppts to 87% (above the industry ratio of 86%) vs. our loans & deposit growth forecasts 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 government & statutory bodies and individual deposits, falling by 6.5% each. CASA fell by 80bps to 19.2% of total deposits.

Asset quality improved with GIL ratio adding another 8bps to 1.9%. Loan loss coverage (LLC) was up 3ppts to 64% (vs. industry coverage of 96.2%). Credit charge was at 0.45% (vs. a credit recovery) of 0.04% the year before (we were expecting 0.67%).

CET1 fell by 38bps whilst CAR improved by 77bps to 11.3% and 14.3%, (after deducting proposed dividends) but still above the regulatory requirements of 7% and 10.5%, respectively. The drop in CET1 was due to RWA growth outpacing CET1 growth.

ROE was recorded at 4.5% (vs. our forecast of 4.4%).

3Q15 vs. 2Q15, QOQ

On a quarter to quarter basis, CNP fell 5%, dragged by higher operating losses of RM20m vs. losses of RM6m in the previous quarter. The losses were attributed to a JV associate. However, the fall was mitigated by decline in impairments by 30% and a drop in tax rate by 3ppts to 27%.

NIM fell by 8bps to 1.96%.

Loans growth was better at +3.5% (3Q15:+0.5%) whilst deposits growth rebounded 9.0% (3Q15:-6.7%) forcing LDR to fall by 4ppts to 87%. However, CASA fell by 90bps to 19%.

Asset quality did not improve as GIL ratio was at 1.9% (2Q15:2.2%). Credit cost fell by 9bps to 0.20%.

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: We imputed 5.5% (previously 7.5%) for FY16 and 5.7% for FY17.

Customer deposit growth: We factor in a 3.0% growth for FY16 (previously 5%) and 3.1% for FY17.

NIM: At 1.9% for FY16 (from 2.1%) and FY17.

CIR: Unchanged at 55% for FY16 and the same ratio for FY17.

Credit charge ratio: 0.44% for FY16 (from 0.32%) and the same figure for FY17.

Change to Forecasts

We revised our downward FY16E earnings by 33% lower to RM355m from RM529m representing a -4% YoY, and introduced our FY17E net profit estimate of RM338 (-5% YoY) where we expect the trend to be similar with FY16E.

Rating

Maintain UNDERPERFORM.

Valuation

We reduce our target price (TP) to RM1.68 (from RM2.17) based on a blended FY16E price-book (PB)/ price-earnings (PE) ratio of 0.4x /8.8x (previously PB/PE of 0.5x/9.0x).

The lower PB ratio reflects weakening ROE whereas the PE ratio represents the Group’s average 5- 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 - 29 Feb 2016