Period

1Q16/3M16

Actual vs. Expectations

1Q16 net profit of RM1.23b was within expectations, accounting for 25% of our/consensus estimates due to improved NIMs and lower-than-expected credit costs.

Dividends

As expected, no dividend was declared for the quarter.

Key Results Highlights

1Q16 vs. 1Q15, YoY

1Q16 net profit advanced 5.0% (1Q15: +15.2%) on the back of: (i) stronger total income of +10.6% (1Q15: +9.8%), and (ii) drop in allowances for impairment by 11% (vs 1Q15: - 10.2%)

Total income was robust (+10.6%) with stellar performances from: (i) net interest income (NII) at +9.8% (1Q15: +9.4%), (ii) net income from Islamic Banking at +11.3% (1Q15: -0.6%), and (iii) slightly lower performance from Non-Interest Income at +12.4% (1Q15: +15.7%)

NOII was lower compared to a year ago due to: (i) lower fee based income at +3.1% (vs 1Q15: +14.7%), (ii) decline in gains on financial instruments at 29.4% (vs 1Q15: +7.5%) but mitigated by higher operating income at +71.8% (vs 1Q15: +25.8%).

Net interest margin (NIM) improved by 10bps to 2.2% (1Q15: 12bps compression) attributed to improved average lending yields by 10bps whilst cost of funds stabilized.

Loans and deposits growth rates dropped to single-digit performance at the Group level with growth of 9.5% and 7.4%, respectively (1Q15: +11.7% and +7.2% respectively (vs. industry loan and deposit growth of 7.4% and 1.2%, respectively). With stronger loans growth, LDR came in at 90.4% (1Q15: 88.7%).

Current account and Savings account deposits (CASA) rose marginally at +0.7% (1Q15: +7.9%); thus, percentage of CASA to customer deposits dipped by 160bps to 23.4% of total deposits.

Cost-to-income ratio (CIR) up by 50bps to 31.5% (vs. industry average of 49%) as opex outpaced total income by 1.6ppts at +12.2%.

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 10bps to 0.02%. Improved recovery rate led to lower collective assessment allowance. Loan loss coverage stayed above 100% at 120.1% (vs. the industry’s 92.8%).

Annualised ROE dipped by 1.8ppts as growth in shareholders’ equity outpaced growth in net profit by 5.8ppts at +10.8% .

CET1 and Total Capital Ratio remained stable and healthy at 10.8% and 15.2% respectively and still above the regulatory required levels of 8.5% and 10.5% respectively.

1Q16 vs. 4Q15, QoQ

Net profit declined by 17.6% primarily dragged by: (i) allowances for impairment losses of RM67m compared to writebacks of RM105.7m in 4Q15, (ii) higher tax rate of 24.6% (vs 18.9% in 4Q15), and (iii) marginal growth of total income at +3.0%.

Marginal growth in total income was due to: (i) subdued NII growth of 1.8%, and (ii) NOII fell by 7.2%.

NIMs advanced by 3bps to 2.18%.

Deposits growth of 1.8% outpaced loans by 40bps leading LDR to dip by 40bps to 90.4%.

CIR was up by 1.5ppts to 31.5% as opex outpaced total income by 5ppts at 5.3%.

GIL was flat 0.5% but LLC fell by 7bps to 120.1%.

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 91% makes bank lending difficult. As for asset quality, we expect it to stabilize with credit costs facing upward pressure due to higher costs of living. NIMs downward pressure is likely to persist on the back of stiff price-based competition for loans and deposits.

We maintained our forecasts: (i) ROE at 15.3%/14.2% for FY16/17 (Management’s guidance for FY16: above 15%). (ii) Loans growth of 9%/9% for FY16/FY17 (Management for FY16: 8%-9%) (iii) Deposits growth at 7%/7% for FY16/FY17 (Management for FY16: 7-8%). (iv) NIMs at 2.07% (7bps compression) for FY16 and another 3bps compression in FY17 (Management for FY16: +/- 8bps). (v) Credit charge ratio at 0.15%/0.14% for FY16/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

As the results were in line, there is no change to our forecast of RM4,827m/RM4,757m for FY16/FY17.

Rating

Maintain MARKET PERFORM

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

Valuation

We raised our TP to RM20.05 (from RM19.23 previously) as we rollover our valuation to FY17E. This is based on a blended 2.6x FY17E P/B and 13.74x FY17 P/E (previously 2.4x FY16 P/B and 14.9x FY16 P/E). The P/B and P/E are based on their 5-year average which we feel is justified given its consistent performance.

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 - 21 Apr 2016