9M16 core earnings of RM392m exceeded both our and consensus expectations accounting for 103%/86% of our/consensus estimates. An interim dividend of 3.0 sen/share was declared. We revised upwards our earnings estimates as its results performance has exceeded our earlier expectations. TP raised but maintain UNDERPERFORM.

9M16 core net profit (CNP) improved by 44%, underpinned by lower loan loss provisions by 84% to RM23m. Top line was better than the year before surging 5% driven by improvement in Net Interest Income (NII) at +2%, Islamic Banking income (+11%) and Non-Interest Income (NOII) at +7%. NII was subdued as loans were slower at +1.8% (vs. our forecast of +5% and industry’s +4.2%) and NIM falling by 17bps to 1.7% (a surprise) Deposits rebounded to +6.3% (vs. our forecast of +6% and industry’s +0.8%) which led to falling loan-to-deposit ratio (LDR) by 3ppts to 88%. Asset quality improved with gross impaired loans ratio (GIL) falling by 13bps to 2.1% and credit costs falling by 53bps to 0.01%.

CNP for the 3rd quarter, however, was slower at 2% despite top line improving by 6% dragged by higher provisions for impairments of RM22m vs RM2m in 2Q16. LDR fell by 3bps to 88% as deposits growth (+6%) outpaced loans (-0.4%). Asset quality deteriorated for the quarter under reviewed as GIL added 10bps to 2.1% with credit costs (loans & other assets) surged 13bps to 0.14%.

Not so rosy outlook. While top line growth was in line with our estimates, the lower impairment allowances and lower operating gains were a surprise to us as we had expected the reverse. Management guided for a 15bps-credit charge ratio. The rise in GIL could be attributed to a rise in loans reclassified as Restructured & Rescheduled (R&R) as management had previously indicated that asset quality was under control and did not foresee further deterioration but given the challenging environment asset quality could deteriorate further. The compression in NIM was not unexpected as we believe management was into shoring its deposits (hence higher cost of funding) which led LDR falling to 88% as it was targeting LDR of 85%-90. Going forward, we expect NIM to stabilize as subdued loans will curtail the need to enhance liquidity.

Earnings revised upwards. As earnings exceeded expectations, we revised our forecast earnings and assumptions for FY16E/FY17E such as: (i) credit charge at 0.08%/0.20% for FY16E/FY17E (from 0.20%/0.20% previously) as we are still cautious with the challenging environment, (ii) loans growth at +3%/+3% for FY16E/17E (previously 5%/6%), (iii) deposits growth of +6.4%/+6.1% (previously 1.2%/1.6%) for FY16E/FY17E, (iv) NIMs slightly higher by 1bps/flattish for FY16E/FY17E (from improving by 5bps/flattish for FY16E/FY17E), and (v) CIR at 60%/57% (unchanged) for FY16E/FY17E. We also raised our estimates for NOII in FY16E/FY17E by 2.5%/1%. Our forecast earnings are revised upwards by 15%/6% to RM447m/RM467m for FY16E/FY17E.

Target Price raised, but Rating maintained. We revised our TP upwards to RM2.20 (from RM2.04), based on blended FY17E 0.5x P/B and 8.5x FY17E PER (previously FY17E 0.5x P/B and 8.7x FY17E PER). The lower PE is justified as we expect slower loans growth in FY17. Maintained UNDERPERFORM as we feel that Group’s asset quality will still be challenging in the light of the volatile environment.

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: Kenanga Research - 01 Dec 2016