INVESTMENT HIGHLIGHTS

• FY16 net profit within expectations.

• Normalised FY16 net profit, stripping one-off costs in FY15, grew +4.5%yoy from NII growth and contained OPEX.

• Strong loans growth contributor to NII growth.

• Robust expansion of CASA franchise.

• Higher provisions due to accounts in Thailand and Indonesia but expected to trend lower in FY17.

• Asset quality steady.

• Dividend of 12 sen bringing total dividend of 20 sen for FY16.

• No change to our forecast.

• Optimistic on the Group's prospect in FY17. Maintain BUY with unchanged TP of RM5.90 pegging the stock to 1.1X Price-to-Book multiple.

Net profit within expectations. The FY16 net profit came in within expectations at 98.5% and 101.8% of ours and consensus’ full year estimate respectively.

Robust NII and contained OPEX main contributor to growth. Normalised net profit (excluding one-off cost in FY15 such as MSS cost and restructuring cost, amounting to RM491m) grew +4.5%yoy to RM3.56b. On non-normalised basis, net profit growth was +25.1%yoy. Robust NII growth coupled with contained OPEX moderated the higher impairment and provisions, which lead to the net profit growth.

Strong loans growth factor to NII growth. NII grew +5.3%yoy to RM11.26b despite NIM compression of -3bps yoy to 2.63%. This was due to the strong gross loans growth of +8.7%yoy to RM323.7b, which was supported by consumer banking (+8.9%yoy to RM160.9b) and wholesale banking (+9.7%yoy to RM117.5b) segments. From the consumer banking segment, mortgages (+11.1%yoy to RM80.2b) and term loans (+8.7%yoy to RM36.3b) were key contributors. In our opinion, the most pleasant surprise was the loans growth in Malaysia, where it grew +10.5%yoy given the weak loans growth environment in the country

Stellar expansion in CASA franchise. Another factor for the NII growth was the stellar CASA growth of +10.4%yoy to RM120.8b, especially the double digit growth in Indonesia (+18.1%yoy to RM30.7b), Thailand (+14.0%yoy to RM10.6b) and Singapore (+23.7%yoy to RM14.1b). In Malaysia, CASA grew +3.8%yoy to RM63.1b, which was respectable given the tight deposit competition. Moreover, the more expensive fixed deposit was contained to grow at only +1.3%yoy to RM145.8b. As a result CASA ratio ticked up 1.5ppt yoy to 35.6%. Overall deposit grew +5.6%yoy to RM338.5b.

Initiatives bearing fruit as OPEX was contained. Normalised OPEX (excluding one-off cost in FY15) grew only +1.0%yoy to RM8.65b as personnel expenses were kept at +1.0%yoy increase to RM4.82b, while establishment cost and marketing cost fell -0.8%yoy to RM1.93b and -13.4%yoy to RM311.6m respectively. Meanwhile, admin and general expenses cost went up by +6.6%yoy to RM1.59b. CI ratio improved further to 53.9% from 55.6% and 59.1% posted in FY15 and FY14 respectively.

Higher provisions but expected to trend lower going forward. Loan impairment and other provisions grew +14.1%yoy to RM2.65b mainly contributed by provisions in Thailand from the steel and agriculture sectors. This was especially the case in 4QFY16, as evident by the +24.6%yoy to RM751.6m rise in loan impairment. We also note that the higher loan impairment came from commercial banking division, where loan impairment grew 186% to RM617.9m. As a result of the higher loan impairment and provisions, loan loss charge inched up by +1bps yoy to 74bps. However, for FY17, we expect there will be gradual reduction in provisioning. Management targets a loan loss charge of 60-65bps in FY17 which in-line with our expectations.

Asset quality in Malaysia steady, but slight deterioration in Indonesia and Thailand. The GIL ratio went up to 3.3% from 3.0% registered as at 4QFY15. Bulk of the impaired loans were in Indonesia (+10.8%yoy growth in impaired loans) and Thailand (+57.3%yoy). However, we believe that asset quality remains stable given that impaired loans in Malaysia were steady (-0.5%yoy) and majority of the impairment came from the corporate segment. We understand the Group have been rebalancing its loans portfolio and managing its asset quality by stepping up its recovery efforts.

T18 have made a positive impact. We believe that T18 initiatives are showing the desired results where CI ratio have trended downwards, while CET1 trended upwards and income contribution from Consumer and Commercial banking steady. While, ROE had lagged behind its targets, we believe that it is a matter of time before we see improvement as well. Especially as the Group makes headway into regional markets such as Vietnam and Philippines.

FORECAST

No change to our forecast.

VALUATION AND RECOMMENDATION

We continue to be impressed with the performance of the Group in FY16. Most notable of its achievements was the strong loans growth, robust expansion of its CASA franchise and the Group’s efficiency as evident by the improvement in CI ratio. Asset quality is a slight concern but we note that this is confined to Indonesia and Thailand, and mostly in the corporate or commercial segment. We believe that the situation will improve and we expect a gradual reduction in provisioning in FY17. In addition, we believe that current valuation remains attractive as the stock is trading at 0.9x to our FY17 BVPS, which is significantly below its 5-year average PBV of 1.8x. We are sanguine on the prospect of the Group, coupled with its relatively cheap valuation, we maintain our BUY recommendation with unchanged TP of RM5.90. Our TP is based on pegging its FY17 BVPS to PB multiple to 1.1x which is 1 standard deviation below its 5- year historical PBV.

Source: MIDF Research - 1 Mar 2017