3Q16 core earnings of RM57.9m were within our expectation but below consensus, accounting for 76.4%/61.2% of our/consensus estimates. No dividends declared as expected. We maintained our earnings estimates for FY16/FY17 but TP reduced to reflect better its performance going forward with MARKET PERFORM call reiterated.

3Q16 net profit fell by 8.1% to RM57.9m mainly due to: (i) higher provisions for loan losses, which grew 16.7%, and (ii) plunge in other operating income by 49.7%. The spike in provisions was in line with our estimates as we had expected provisions of RM700m for FY16.

9M16 vs 9M15, YoY

• 9M16 net profit declined by 43.0% to RM155.8m (9M15: RM273.4m) attributed to surge in provisions for loan losses of 41.1% to RM608.4m (9M15: RM431.1m).
• Total income marginally improved, by 1.3%, to RM1,031.0m as growth in Islamic Banking Income by 4.0%, to RM849.8m compensated the declines in Net Interest Income (NII) of 9.2%, and Other Operating Income of 11.1% to RM140.7m and RM40.5m, respectively.
• Net Interest Margins (NIMs) improved 60bps to 4.5% while costto-income ratio (CIR) inched down by 10bps to 22.8% (vs. our expectation of 25%).
• Loan-Deposit Ratio (LDR) dropped by 2ppts to 112% as deposits grew 6%, outpacing loans growth of 4.6%, in line with our expectation a 5.9% and 4.6% growth, respectively.
• Growth in loans of 4.6% (9M15: +3.7%) was underpinned by rise in Corporate loans and financing at (+38.6%) despite declines in both Personal financing (-1.4%) and Auto financing (- 3.3%). Following management’s plan to focus on Corporate segment and reducing its Personal financing portfolio, Corporate loans financing grew 38.6% with Personal financing falling by 1.4%, contributing 18.7% and 19% of total loans, respectively (9M15: 14.9% and 67.9% respectively).
• Asset quality deteriorated as Gross Impaired Loans Ratio (GIL) went up by 50bps to 7.5% while Credit Costs went up by 60bps to 2.3%. Loan Loss Coverage was up by 23ppts to 110.6%.
• Annualised ROE fell 4ppts to 3.9% as earnings faltered on higher impairments.

3Q16 vs. 2Q16, QoQ

• Net Profit declined by 8.1% to RM57.9m due to higher Provision for Loan Losses (+16.7%) at RM210.0m.
• Total Income grew 6.8% to RM361.5m contributed by better Net Interest Income (+40.6%) to RM52.6m.
• NIM improved by 20bps to 4.7%. CIR reduced by 3ppts to 21.5% as Operating Expenses fell 7.2% while income grew.
• LDR remained flattish at 112% as Gross Loans and Deposits grew 1.6% and 1.1%, respectively.
• Asset quality was mixed with GIL reduced by 50bps to 7.5% while Annualised Credit Costs went up by 30bps to 2.4%.

Source: Kenanga Research - 25 Nov 2016