1Q16 core earnings of RM115m were within expectations accounting for 28%/26 of our/consensus estimates. No dividends declared as expected. We keep our earnings estimates for the Group unchanged, but TP raised to RM2.23 as we roll over to FY17 and upgrade our call to MARKET PERFORM. 1Q16 core net profit (CNP) improved tremendously by 284% brought about by higher net interest income and writeback of RM1.6m vs allowances for impairment losses of RM124m in the previous corresponding period.

3M16 vs 3M15, YoY

Total income fell by 4.9% brought about by declines in Islamic banking income at -5.3% (1Q15: +9.6%) and non-interest income (NOII) at -19.5% (1Q15: +80%) but mitigated by growth from Net Interest Income (NII) at 6.8% (1Q15: -1.8%).

NIM deteriorated by 7bps to 1.65% as cost of funds was up by 4bps. (We expected a 7bps compression for FY16).

CIR deteriorated by 4ppts to 63.9% (vs industry’s CIR of 50.6%) as opex growth (+1.3%) outpaced total income growth (-4.9%).

LDR surged by 5ppts to 88.4% (above the industry ratio of 86.9%) as loans (+8.9% vs industry’s +6.4%) outpaced deposits (+2.6% vs industry’s -0.9%) vs. our loans & deposit growth forecasts of 6.0% and 3.9% respectively.

Loans growth was driven mostly by syndicated loans and HP at +39.2% and +7.7% respectively. Corporate loans which make up 31% of total loans fell -1.7%. The slower growth in deposits was due to drop in individual deposits, falling by 5.6% but mitigated by increase from domestic banking institutions by 35.5%. CASA fell by 2ppts to 17.7% of total deposits.

Asset quality deteriorated slightly with GIL ratio adding another 2bps to 1.98%. Loan loss coverage (LLC) was down by 6ppts to 61.8% (vs. industry coverage of 94.3%). There was a credit recovery of 0.01% (vs. a credit charge ratio of 1.2% the year before (For FY16, we are expecting a credit cost of 25bps).

At the bank level, CET1 fell by 40bps whilst CAR improved by 80bps to 11.9% and 14.4%, (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.

Annualised ROE was recorded at 5.5% (vs. our forecast of 4.9%).

1Q16 vs. 4Q15, QoQ

On a quarter to quarter basis, CNP surged +18.6%, due to the above-mentioned writebacks and a lower taxation rate of 22.9%.

NIM fell by 31bps to 1.6%.

Loans growth inched slightly at +0.8% (4Q15: +3.5%) whilst deposits growth fell by 1.0% (4Q15: +9.0%) forcing LDR to increase by 140bps to 88.4%. However, CASA fell by 150bps to 17.7%.

Asset quality did not improve as GIL ratio was up by 8bps to 1.98% (4Q15: %). Credit recovery was at 0.1% vs 4Q15 credit charge of 0.20%.

Outlook. As competition for deposits still intense, we expect NIM compression to be unavoidable as management strives to shore its deposits. Although there was a credit recovery in 1Q16, we believe allowance for impairments will prevail in FY16 due to the challenging economy. As for loan growth we maintained +6% yoy for FY16 as management’s focus will be more on bring up its mortgage loans (1Q16: 14% of the portfolio) up to the industry ratio of 30%. On its HP financing (27% contribution to loan portfolio), management will still focus on the non-national car segment which makes up 80% of its HP portfolio as these have better yields and is focused mainly on the high-income group No change in earnings. As earnings were within expectations, we made no change in our forecast earnings and our assumptions for FY16/17E maintained such as: (i) credit charge at 0.25% for FY16/17E, (ii) loans growth at 6/6.1% for FY16/17E, (iii) deposits growth of 4/4.1% for FY16/17E, (iv) NIMs compression by 7bps/stable for FY16/17E, and (v) CIR at 55% for both FY16/17E.

Target Price raised and call raised to MarketPerform. We raised our TP to 2.23 (from RM1.80) as we roll over our valuation to FY17, based on blended FY17E 0.5x P/B and 10.6x FY17E PER. Previously, we use FY16E PB/PE 0.4x/8.8x. The higher PE is justified as we expect better loans growth in FY17. Risks to our call are: (i) higher than expected margin squeeze, (ii) higher-than-expected loans and deposits growth and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanaga Research - 25 May 2016