Post-meeting with management yesterday, we are inclined to believe that the major issue plaguing the Group, i.e. asset quality, is stabilizing if not over. Overall asset quality is seen stabilizing with no visible sign of deterioration. However, earnings growth is still seen as a challenge in both domestic and regional operations. We maintained our TP and OUTPERFORM call as we see value with the recent sharp pullback in its share prices.

Asset Quality. The Malaysian operation is seeing satisfactory asset quality with no signs of deterioration. SMEs and Corporate loans quality is seen holding up with nothing unusual in terms of R&R (rescheduling & restructuring). Niaga’s asset quality is also satisfactory, on track as targeted and expected to improve in 2H16. There are still concerns from the Thai operations with asset quality issues arising from its SME loans and the likelihood of more provisioning ahead. Overall, management is satisfied with the asset quality of the Group.

Earnings still under pressure. The recent Base Rate (BR) revision due to the cut in OPR is expected to compress NIMs by 3bps for its Malaysian operations. NIMs compression in Indonesia is seen holding up, with NIMs above 5% and we expect further compression due to growing deposits intake. Management maintains its overall NIMs compression of 5-10bps. As for loans growth, management indicated that Indonesia loans growth are rather subdued and do not expect its target of 7-8% achievable but closer to a midsingle digit. The Indonesian rate cut (by 75bps) had helped maintain stability in terms of loan loss provisions but corporate loans remained quiet albeit cautious. Loans growth in Malaysia will be challenging as origination is tighter and vigilant. Earnings from the recently concluded tie-up with Japan’s SOMPO is expected to come on stream from Indonesia by 4Q16, with earnings from Malaysia (3Q17) and Thailand (4Q17) coming in FY17. Fees received will depend on sales taken and much of the sales is expected to come from both Indonesia and Malaysia.

Mediocre days ahead. Management still guided for loans and ROE growth of 10% for FY16 but admits that these targets are challenging. Beside the operations mentioned above, the Singapore operations are also subdued with both Net Interest Income (NII) and Non-Interest Income (NOII) facing challenges with loans growth expected in the single digit. Overall, the focus for the Group for 2016 is consolidation with emphasis on cost cutting, capital & business optimization and shifting portfolios as revenue growth is a challenge. Management expects 2017 to be a better year as asset quality issue is expected to subside and the growing phase of its business is likely to start thereafter.

Forecasts & risks. No change to our forecasts as we render existing assumptions to be conservative at present. Key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans & deposits growth, (iii) higher-thanexpected rise in credit charge, (iv) further slowdown in capital market activities, (v) unfavourable regulatory changes, and (vi) adverse currency fluctuations.

Valuation & recommendation maintained. For now, we keep our GGM-TP of RM4.87 (from RM4.71 previously). This based on a 0.9x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17 ROE of 8.2%, and (iii) terminal growth of 2.5%. Value has started to emerge given the recent pullback in share prices. Asset quality is stabilizing and it is trading at a 10-year low of 0.8x P/B compared to the industry’s current trading level of 1.5x P/B. Hence, we believe that the stock price has bottomed out. Maintain OUTPERFORM.

Source: Kenanga Research - 20 Jul 2016