INVESTMENT HIGHLIGHTS

• FY16 net profit within ours and consensus’ expectations

• NII robust with uptick of NIM from better funding cost management

• CI still amongst the lowest in industry

• Healthy gross loans growth with asset quality remains strong with GIL ratio of 0.5%

• Liquidity supported by deposit growth with improved CASA ratio

• Tweaked our forecasts upwards by +2.0% for FY17

• Second interim dividend of 32 sen. Total dividend for FY16 is 58 sen, 43% payout ratio

• Maintain BUY with a revised TP of RM22.60 (previously RM22.20) as we pegged FY17 BV to a its 5 year historical PB multiple of 2.4x

FY16 net profit within expectations. The Group posted FY16 that was within ours and consensus’ expectation coming in at 104% and 105% of respective full year estimates. The net profit growth of +2.9%yoy to RM5.21b was on the back of robust NII and Islamic Banking income growth, moderating the impact from higher OPEX and lower NOII.

Steady PPOP growth. OPEX grew +10.2%yoy due to higher personnel and establishment costs. However, PPOP in FY16 grew at a decent +1.7%yoy, mainly due to NII and Islamic Banking income which grew +8.5%yoy and +13.6%yoy respectively. NII growth was supported by uptick in NIM (+3bps yoy) in 4QFY16 and better funding cost management whereby the Group exited in some higher priced wholesale deposits.

Higher CI but still amongst lowest in industry. As a result of higher OPEX, FY16 CI came in at 32.3%%. However, this was still below industry average of 48.8%. Personnel cost went up by +8.3%yoy to RM2.25b. However, the higher personnel cost was compensated by higher productivity. Gross loan per employee and deposit per employee grew +6.0%yoy and +1.2%yoy to RM15.8m and RM16.6m respectively

ealthy gross loans growth... FY16 gross loans grew +7.5%yoy to RM294.0b as the gross loans gathered pace as at 4QFY16 (+2.0%yoy vs. +1.7%yoy as at 3QFY16). Domestic loan growth stood at +7.2%yoy to RM269.9b vs. industry loans growth of +5.3%yoy. Retail and SMEs remains its key domestic market accounting 85% of total loans. Retail operations went up +8.0%yoy to RM182.4b, whereby loans for residential properties grew +10.5%yoy to RM92.6b.

…while asset quality remains strong. Furthermore, asset quality remains strong despite the robust loans growth. GIL ratio as at FY16 was flat at 0.5%, substantially below industry’s GIL ratio of 1.6%. Only a slight concern was the uptick in GIL in the residential properties segment where it grew to RM570m from RM445m as at end FY15, or an uptick of +10bps yoy to 0.6%, in terms of GIL ratio. This came from the low cost houses. However, there was an improvement in GIL ratio of transport vehicle and SMEs of -10bps yoy to 0.6% and 0.3% respectively.

Liquidity supported by deposit growth. Deposits grew +2.9%yoy to RM310.0b. Pace of growth came of slightly due to -2.5%qoq contraction in deposits when compared with 3QFY16. However, we understand that this was due to rebalancing of its deposit portfolio. The Group reduced its wholesale deposits by -7.5%yoy to RM51.7b, whilst core customer deposit grew +5.3%yoy to RM258.2b. We liked the fact that the Group managed to grow its CASA franchise despite the competitive climate. CASA grew +6.8%yoy to RM78b, resulting in CASA ratio improvement of +1.0ppt to 25.2%. Fixed Deposit growth was also moderated to +3.7%yoy vs. +15.4%yoy as at FY15.

Guidance for FY17 targets. The Group guided its FY17 targets of: i) ROE of 14-15%, ii) RWCR of >13%, iii) GIL ratio < 1%, iv) CI ratio of 33.0-34.0%, v) Loans growth of 6-7% and vi) Deposit growth of 5-6%. We believe that these targets are achievable. Moreover, we believe that its loans growth target to be conservative. We premised our opinion on the fact that we expect that there will be an improvement to Malaysia’s GDP in FY17 and what we have seen with the Group’s pursuit of operational excellence as well as prudent credit and financial management.

FORECASTS

We tweaked our FY17 forecast upwards by +2.0% in light of the good result and guidance from management.

VALUATION AND RECOMMENDATION

We are impressed by the Group’s ability to continue to generate stable profitability despite the challenging environment. Management of the business remains sound with healthy loans growth and robust asset quality. We especially like the fact that the NIM compression was managed well, with an uptick in 4QFY16. We expect that NIM will continue to be under pressure but it will be manageable for the Group. Its loans growth target for FY17 seems conservative but within our expectations for industry’s loans growth. Overall, we do not foresee any particular stress and believe that FY17 may see better earnings. Therefore, we do not see a reason to change our call. We maintain BUY for the stock. By revising our earnings for FY17, we also revised our TP to RM22.60 (previously RM22.20). Our TP is based on pegging PBV to 2.4x which is its 5 year historical PB multiple

Source: MIDF Research - 3 Feb 2017