1H16 core earnings of RM98m were above our expectation but below consensus, accounting for 64%/33% of our/consensus estimates. No dividends declared, as expected. We revised our earnings estimates for FY16/FY17 with TP raised but with a MARKET PERFORM call.

1H16 core net profit (CNP) was above our expectations but declined by 53% YoY attributed to higher impairments. The variance to our forecast was due to lower than expected (i) cost-to-Income ratio and (ii) NIM compression.

6M16 vs 6M15, YoY

• 6M16 reported Net Profit (NP) fell by 53.4% (6M15: -50.3%), dragged by higher allowances for impairment losses of RM398m (6M15: RM236m).
• Total income fell by 1.8% (6M15: -5.9%) dragged by fall in Netinterest income (NII) by 18.1% (6M15: -14.2%). Both Islamic Banking income and other Operating Income grew by 1.2% and 1.5%, respectively (6M15: -1.8% and -32.3%, respectively).
• NIM compressed by another 20bps to 3.2% (vs. our earlier expectation of 40bps compression) while cost-to-income ratio (CIR) was almost flat at 23.5% (vs. our expectations of 28%).
• No change in Loan-Deposit Ratio (LDR) at 112% as loan and deposit growth was similar at 4% (6M15: loan/deposits growth was at +4.1%/+1.9%). We had expected loan and deposit growth of +5% and +6%, respectively.
• Corporate loans/financing accounted for 16.9% of total loans/financing (6M15: 13.1%) whilst Personal Financing fell by 3ppts to 66.2% and mortgage financing fell 40bps to 15.7%. The rise in corporate loans/financing is in line with management’s strategic focus to grow the segment while reducing personal financing.
• Asset quality deteriorated as gross impaired loans ratio (GIL) went up by 110bps to 8%. Credit costs went up by 70bps to 2.3%. However, loan loss coverage was up by 17ppts to 97.9%.
• Annualised ROE fell 5ppts to 4% as earnings were shaved drastically by higher impairments.

2Q16 vs. 1Q16, QoQ

• Estimated Core NP was up by 80.9% to RM63.0m due to lower allowances for impairment at RM179.9m(-17.9% QoQ). The lower provisions were attributed to better recovery in the quarter.
• Topline growth rose marginally by 2.3%, brought about by improvement in Islamic Banking income and other Operating Income of 6.7% and 21.8%, respectively. NII fell by 26.3%.
• NIM was well contained as it remained flat at 3.2% while cost-to- Income ratio (CIR) increased by 2ppts to 24.8% as opex (+14.5%) outpaced income growth.
• Deposits growth at 2% vs. loan growth of 1% resulting in a lower LDR by 1ppts to 112%.
• Asset quality was mixed as GIL went up by 10b bps to 8% but credit charge went down by 40bps to 2.1%.

Source: Kenanga Research - 9 Aug 2016