malaysia industry focus malaysian banks - dbs bank | singapore rhb bank (rhb), which booked high...
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ed-TH / sa- BC, PY
Staying on the defence
• 3QCY16 results emitting first sign of hope; but still too early to turn positive
• Asset quality remains the main swing factor; imputing higher-than-guided credit costs
• Assuming a worst-case scenario, CY17 could be another year of muted earnings growth; sustainable re-rating in valuations remains challenging
• Sticking to the best; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks
3QCY16 results emitting first sign of hope. The recent 3QCY16 results finally showed y-o-y growth in earnings, after eight consecutive quarters of decline. While we read this as an early indication of the end of the earnings downgrade cycle, we believe it is still too early to be bullish on the sector. We would turn more positive when issues affecting (1) asset quality, (2) loan growth, and (3) NIM, start to taper off. Asset quality still the main swing factor. At this juncture, asset quality could surprise on either side – positively if reclassification of rescheduled and restructured (R&R) loans (from impaired to performing status) are more pronounced than new formations, or negatively if the vulnerable segments continue to be strained amid the challenging operating environment. In our base case, we have placed a caveat on the extent of reclassifications and imputed credit costs that are higher than guided by management. Recoveries are tapering off; credit costs should normalise in 2017. Still no impetus to drive top-line growth. Judging from the weak loan application and approval trends, we expect another year of benign loan traction in 2017, with growth hitting 5% at best. Further cuts in Overnight Policy Rate (OPR) next year may result in more NIM pressure than expected (base case assumption is -2bps y-o-y). Positively, the banks may be able to mitigate the impact by reining in their high cost deposits, as seen in the recent quarter’s results. NIM pressure is likely more pronounced for CIMB as the bank is shifting its focus to higher-quality loans tagged with lower yields, particularly in Indonesia. Keeping defenses up; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks. Although sector valuations are at a 10-year low, a sustainable re-rating in valuations remains dubious in the absence of tangible revenue drivers. We prefer to stick to banks with solid metrics - Public Bank (PBK) and Hong Leong Bank (HLB). PBK remains resilient in this challenging operating environment while HLB has strong liquidity apart from robust asset quality. A better-than-expected recovery from its associate, Bank of Chengdu, could surprise on the upside. Key risks would be our view on asset quality, loan growth and NIM. Assuming a worst-case scenario (3% loan growth, 10bps compression in NIM and credit cost higher at 40bps), our back-of-the-envelope calculation estimates earnings growth to reach 1% instead of 11%, indicating another year of muted earnings growth.
KLCIKLCIKLCIKLCI : : : : 1,629.731,629.731,629.731,629.73
Analyst Sue Lin LIM +65 8332 6843 Lynette CHENG +60 32604 3907 [email protected] [email protected] STOCKS
Source: DBS Bank, AllianceDBS, Bloomberg Finance L.P.
Closing price as of 6 Dec 2016
Malaysian Banks: Earnings growth trend
Source: Companies, DBS Bank, AllianceDBS
Malaysian Banks: Credit cost trends
Source: Companies, DBS Bank, AllianceDBS
17.0 17.0 17.0 17.0 8.2 8.2 8.2 8.2
(2.4)(2.4)(2.4)(2.4) (3.7)(3.7)(3.7)(3.7)
2.5 2.5 2.5 2.5
10.7 10.7 10.7 10.7
-40
-30
-20
-10
0
10
20
30
40
CY12 CY13 CY14 CY15 CY16F CY17F
%%%%
AMMB AFFIN CIMBHLB MAY PBKRHBBANK AFG Sector
DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity
7 Dec 2016
Malaysia Industry Focus
Malaysian Banks Refer to important disclosures at the end of this report
Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)
RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating
Affin Holdings Berhad
2.30 1,005 2.00 7.5 (0.4) FV Alliance Financial Group
3.86 1,323 NA (3.5) 8.4 NR
AMMB Holdings 4.23 2,866 4.50 (3.9) (9.0) HOLD CIMB Group Holdings
4.64 9,250 4.80 (3.9) 4.1 HOLD Hong Leong Bank 13.48 6,219 15.00 2.6 5.3 BUY Maybank 7.88 18,056 7.50 0.1 (5.9) HOLD Public Bank 19.62 17,031 22.60 (1.4) 7.3 BUY RHB Bank 4.79 3,311 5.40 (5.2) (20.2) BUY BIMB Holdings Berhad
4.27 1,525 NA 5.7 10.3 NR
Hong Leong Financial Group
14.84 3,820 17.00 (7.3) 7.4 BUY
Industry Focus
Malaysian Banks
Page 2
Table of Contents A glimmer of hope 3
Hopeful on asset quality stabilisation 5
Loan growth likely to stay muted 7
NIM risk if there is a further rate cut 7
Valuation and recommendation 8
Appendix 10
Company Guides
Affin Holdings 17
AMMB Holdings 25
CIMB Group 33
Hong Leong Bank 41
Maybank 49
Public Bank 57
RHB Bank 65
Hong Leong Financial Group 73
Industry Focus
Malaysian Banks
Page 3
A glimmer of hope
First sign of hope.First sign of hope.First sign of hope.First sign of hope. 3QCY16 results were largely in line, with the
exception of Affin Holdings (AFFIN) which beat expectations on
lower-than-expected credit cost. This is the first quarter pointing
to more positive trends as we saw y-o-y earnings growth for the
sector, after eight consecutive quarters of decline. Earnings were
lifted by lower provisions, mainly driven by Maybank (MAY) and
RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-
provision profits grew on the back of lower expenses. Revenue
growth proves to still be a challenge as it was flat y-o-y.
Consensus haConsensus haConsensus haConsensus haveveveve consistently been overconsistently been overconsistently been overconsistently been over----optimistic on their optimistic on their optimistic on their optimistic on their
forecast since 2014.forecast since 2014.forecast since 2014.forecast since 2014. Actual sector earnings for 2014 and 2015
were below consensus’ initial forecast (in the beginning of the
year) by 9% and 13% respectively. With our ROE forecasts
largely in line or lower than guided (with the exception of PBK),
we are hopeful for an end to the earnings downgrade cycle for
the banks.
Malaysian Banks: Consensus full-year earnings forecast
Source: Bloomberg Finance L.P, DBS Bank, AllianceDBS
Malaysian Banks: ROE trends
Note: No forecasts for AFG
Source: Companies, DBS Bank, AllianceDBS
Staying cautious.Staying cautious.Staying cautious.Staying cautious. While we read this as an early indication of the
end of the earnings downgrade cycle, we believe it is still too
early to be bullish on the sector. We would turn more positive
on the sector when issues affecting (1) asset quality, (2) loan
growth, and (3) NIM starts to taper off.
Malaysian Banks: Earnings growth
Note: No forecasts for AFG
Source: Companies, DBS Bank, AllianceDBS
Revenue growth remains a challengeRevenue growth remains a challengeRevenue growth remains a challengeRevenue growth remains a challenge as loan growth moderates,
NIM narrows and non-interest income continues to lack
impetus. We imputed for less NIM compression in CY17 (-2bps
y-o-y) as opposed to CY16 (-4bps y-o-y), but subsequent policy
rate cuts may result in more pressure on NIMs. Amid lacklustre
loan application and approval trends, we expect 2017 loan
growth to hit mid-single digits at best. We also see no catalyst
to boost non-interest income and expect this to remain sluggish.
Malaysian Banks: NIM trends
Source: DBS Bank, AllianceDBS
Slower growth in overhead and credit costsSlower growth in overhead and credit costsSlower growth in overhead and credit costsSlower growth in overhead and credit costs. As banks are
placing cost management high on their priorities, we are
expecting a tight lid to be held on overhead expenses. We are
forecasting overhead expenses to grow by a meagre 4% y-o-y,
15.5%15.5%15.5%15.5% 14.6%14.6%14.6%14.6%
12.7%12.7%12.7%12.7%
10.3%10.3%10.3%10.3% 9.7%9.7%9.7%9.7%9.8%9.8%9.8%9.8%
0%
5%
10%
15%
20%
25%
CY12 CY13 CY14 CY15 CY16F CY17F
AMMB AFFIN CIMB HLB MAY
PBK RHBBANK AFG Sector
17.0 17.0 17.0 17.0 8.2 8.2 8.2 8.2
(2.4)(2.4)(2.4)(2.4) (3.7)(3.7)(3.7)(3.7)
2.5 2.5 2.5 2.5
10.7 10.7 10.7 10.7
-40
-30
-20
-10
0
10
20
30
40
CY12 CY13 CY14 CY15 CY16F CY17F
%%%%
AMMB AFFIN CIMBHLB MAY PBKRHBBANK AFG Sector
2.46% 2.38%2.25%
2.16% 2.12% 2.10%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
CY12 CY13 CY14 CY15 CY16F CY17F
AMMB AFFIN CIMB HLB MAY
PBK RHBBANK AFG Sector
Industry Focus
Malaysian Banks
Page 4
after a contraction of 1% in CY16. Although we have imputed
for credit cost to trend lower in CY17, this is largely driven by
MAY, RHB and CIMB which have incurred significant provisions
in 2016, from its Indonesian operations (CIMB), oil & gas (MAY
and RHB), as well as steel (RHB) exposure. Excluding these three
banks, our credit cost assumption would be higher y-o-y at
10bps for CY17F (CY16F: 8bps).
Malaysian Banks: Cost-income ratio
Note: Cost-to-income ratio at 50.1% stripping off CY15 exceptionals in CIMB (RM684m costs), RHB (RM309m costs), AMMB (RM268m gain), MAY (RM197m gain), HLB (RM172m costs)
Source: Companies, DBS Bank, AllianceDBS
Malaysian Banks: Credit cost
Source: Companies, DBS Bank, AllianceDBS
45.0%45.0%45.0%45.0%45.7%45.7%45.7%45.7%
46.6%46.6%46.6%46.6%47.2%47.2%47.2%47.2%
48.6%48.6%48.6%48.6%
51.4%51.4%51.4%51.4%
49.8%49.8%49.8%49.8%49.2%49.2%49.2%49.2%
50.1%50.1%50.1%50.1%
40%
42%
44%
46%
48%
50%
52%
54%
CY10 CY11 CY12 CY13 CY14 CY15 CY16F CY17F
1.16%
1.02%
1.08%
1.12%
0.80%
0.68%
0.71%
0.49%
0.28%
0.16%
0.20%
0.18%
0.33%
0.42%
0.32%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16F
CY17F
Sector credit cost Sector credit cost ex CIMB, MAY, RHB
Industry Focus
Malaysian Banks
Page 5
Hopeful on asset quality stabilisation
RetailRetailRetailRetail segment remains stable.segment remains stable.segment remains stable.segment remains stable. While bankruptcy data has not
been updated since mid-2015, we gather that the number of
participants enrolled under Agensi Kaunseling dan
Pengurusan Kredit’s (AKPK; BNM’s Credit Counseling and
Debt Management Agency) Debt Management Programme
serves as a prudent proxy to bankruptcy levels. The increase in
number of enrolments is on a slight uptrend, but not at an
alarming level. It is also noteworthy that loans restructured
under AKPK are not classified as impaired in accordance with
BNM’s guideline. This treatment reflects the inherent controls
built into AKPK’s debt management programme, which
among others, incorporates a rigorous assessment of the
customers’ debt repayment ability under the revised terms
and conditions, and precludes the affected customers from
obtaining further loans as long as they are under the
programme.
Malaysia: Y-o-y change in number of participants in
AKPK’s Debt Management Programme
Source: BNM Economic Report 2016/17
Looking out for the vulnerable segments. Looking out for the vulnerable segments. Looking out for the vulnerable segments. Looking out for the vulnerable segments. We had previously
flagged oil & gas, commodities, steel and commercial property
as sectors we see weakness in. Positively for selected sectors,
improvements in commodity prices (e.g. crude oil, CPO and
steel) have improved the prospects of companies operating in
these sectors. Nonetheless, we believe it would take several
more quarters of stable prices to completely ease concerns on
these sectors. Hence, we continue to favour banks with lower
exposure in these sectors. PBK, HLB and AFG have low
exposures to the oil & gas sector, making up less than 1% of
total loans.
Malaysian Banks: Oil & gas exposure (% of total loans)
MAYMAYMAYMAY CIMBCIMBCIMBCIMB PBKPBKPBKPBK RHBRHBRHBRHB HLBHLBHLBHLB AMMAMMAMMAMM AHBAHBAHBAHB AFGAFGAFGAFG TotalTotalTotalTotal
4.3 2.7 0.0 3.2 0.7 4.0 2.0 0.0 2.6
Source: Companies, DBS Bank, AllianceDBS
Positive surprise in asset quality?Positive surprise in asset quality?Positive surprise in asset quality?Positive surprise in asset quality? Effective 1 April 2015,
rescheduled and restructured (R&R) loans can be reclassified
as performing upon consistent repayment for a period of six
months. Banks such as MAY and RHB accelerated R&R in
2Q16, indicating that more reclassifications could be
impending. In the event reclassifications are stronger than
new formations, credit cost could trend lower on the back of
more write-backs. In our base-case view, we have placed a
caveat to the extent of reclassifications and imputed credit
costs that are higher than guided by management.
Malaysian Banks: Impaired loans ratio
Source: Companies, DBS Bank, AllianceDBS
Favouring banks with high loanFavouring banks with high loanFavouring banks with high loanFavouring banks with high loan loss coverageloss coverageloss coverageloss coverage. While loan loss
coverage may not be at the epicentre of all banks’ attention
(due to high collateral values), we continue to draw comfort in
banks with high loan loss coverage ratio. We believe banks
with high buffers are better positioned to weather the current
volatile environment unscathed. Based on our sensitivity
analysis, every 10-bp increase in credit cost impacts the banks’
net profit by -5 to -7%.
Malaysian Banks: Sensitivity Analysis for a 10-bp increase
in credit cost
FFFFY17Y17Y17Y17 (Current)(Current)(Current)(Current) FY17FY17FY17FY17 (Sensitised)(Sensitised)(Sensitised)(Sensitised) % chg in % chg in % chg in % chg in earningsearningsearningsearnings
Credit costCredit costCredit costCredit cost Net profitNet profitNet profitNet profit Credit costCredit costCredit costCredit cost Net profitNet profitNet profitNet profit
AHB 0.13% 507.7 0.23% 470.0 -7%
AMMB 0.03% 1,251.7 0.13% 1,188.4 -5%
CIMB 0.55% 3,997.9 0.65% 3,741.5 -6%
HLB 0.09% 2,265.5 0.19% 2,142.3 -5%
MAY 0.43% 6,832.4 0.53% 6,465.8 -5%
PBK 0.09% 5,588.1 0.19% 5,319.2 -5%
RHB 0.35% 2,246.7 0.45% 2,118.6 -6%
Source: DBS Bank, AllianceDBS
11,638 15,837
15,534
16,811
16,110
16,769
20,624
22,208
13,189
-
5,000
10,000
15,000
20,000
25,000
2008
2009
2010
2011
2012
2013
2014
2015
7M
2016
2.4%2.4%2.4%2.4%2.0%2.0%2.0%2.0%
1.8%1.8%1.8%1.8% 1.8%1.8%1.8%1.8% 1.9%1.9%1.9%1.9% 1.8%1.8%1.8%1.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
CY12 CY13 CY14 CY15 CY16F CY17F
AMMB AFFIN CIMB
HLB MAY PBK
RHBBANK AFG Sector ex PBK
Industry Focus
Malaysian Banks
Page 6
Loan growth likely to stay muted
Net financing growth supported by strong issuances of Private Net financing growth supported by strong issuances of Private Net financing growth supported by strong issuances of Private Net financing growth supported by strong issuances of Private
Debt Security (PDS).Debt Security (PDS).Debt Security (PDS).Debt Security (PDS). Although loan growth trends were weak in
2016, net financing growth was still relatively robust, thanks to
strong growth in PDS issuances. The strong growth is
presumably attributable to the finance, insurance, real estate
and business services sector which made up more than half of
the debt securities issuances in 2016.
Malaysian Banks: Net financing growth
Note: *2016 growth was annualized **Private Debt Security (PDS) amount represents an estimate from BNM press release figures.
Source: BNM, DBS Bank, AllianceDBS
No respite for loan growth.No respite for loan growth.No respite for loan growth.No respite for loan growth. Plotting a seasonally-adjusted trend
on m-o-m growth, the trend for loan demand has declined since
2010, providing little room to boost loan growth in the near
future. Limiting this further is the even more discouraging
approval trends, which have plunged to negative territory since
early 2014. This could partially be explained by a lower risk
appetite by the banks, but this could also indicate poorer quality
seen in loan applicants. A pick-up in these trends is a challenge,
in our view. Thus, loan growth would likely tread on similar
levels to the current year. We expect loan growth in 2017F to
reach mid-single digit at best.
Malaysian Banks: Loan application trends
Source: BNM, DBS Bank, AllianceDBS
Malaysian Banks: Loan approval trends
Source: BNM, DBS Bank, AllianceDBS
Minimal impact to bottomMinimal impact to bottomMinimal impact to bottomMinimal impact to bottom linelinelineline. Based on our sensitivity analysis,
every 1% decline in loan growth impacts the banks’ net profit
by -0.6 to +0.8%.
Malaysian Banks: Sensitivity analysis for a 1% decline in
loan growth
FY17 (Current)FY17 (Current)FY17 (Current)FY17 (Current) FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised) Change Change Change Change in in in in
earningsearningsearningsearnings
Loan Loan Loan Loan growthgrowthgrowthgrowth
Net Net Net Net profitprofitprofitprofit
Loan Loan Loan Loan growthgrowthgrowthgrowth
Net Net Net Net profitprofitprofitprofit
AHB 5% 507.7 4% 504.8 -0.6%
AMMB 2% 1,251.7 1% 1,262.2 0.8%
CIMB 6% 3,997.9 5% 3,989.3 -0.2%
HLB 6% 2,265.5 5% 2,271.9 0.3%
MAY 5% 6,832.4 4% 6,824.3 -0.1%
PBK 8% 5,588.1 7% 5,584.3 -0.1%
RHB 5% 2,246.7 4% 2,265.3 0.8%
Source: DBS Bank, AllianceDBS
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
-
500
1,000
1,500
2,000
2,500
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%%%%RM bnRM bnRM bnRM bn
Loan (LHS) PDS (LHS) Loan + PDS growth (RHS) Loan growth (RHS)
(10.0)
(8.0)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
-30
-20
-10
0
10
20
30
40
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Se
p-1
1
Fe
b-1
2
Jul-
12
De
c-1
2
Ma
y-1
3
Oct
-13
Ma
r-1
4
Au
g-1
4
Jan
-15
Jun
-15
No
v-1
5
Ap
r-1
6
Se
p-1
6
%RM bn
absolute chg (LHS) est trend % m-o-m (RHS)
(8.0)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
-10
-5
0
5
10
15
20
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Se
p-1
1
Fe
b-1
2
Jul-
12
De
c-1
2
Ma
y-1
3
Oct
-13
Ma
r-1
4
Au
g-1
4
Jan
-15
Jun
-15
No
v-1
5
Ap
r-1
6
Se
p-1
6
%RM bn
absolute chg (LHS) est trend % m-o-m (RHS)
Industry Focus
Malaysian Banks
Page 7
NIM compression risk if there is a further rate cut
Further cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMs. Our base-case assumption is
for NIM to drop by 2bps y-o-y. However, further cuts in
Overnight Policy Rate (OPR) may result in more NIM pressures
than expected. There remains monetary policy space for BNM to
manoeuvre and ease OPR (private consumption growth has
fallen below trend while inflation rate shows little signs of
heating up), and hence an OPR cut should not be discounted.
Positively, the banks may be able to mitigate the impact by
reining in on their high-cost deposits, as seen in most of the
banks’ results in 3QCY16.
3QCY16 NIM trend
qqqq----oooo----q NIM trendq NIM trendq NIM trendq NIM trend ReasonReasonReasonReason
MAYMAYMAYMAY Minimal slippage Funding cost management
CIMBCIMBCIMBCIMB Lower Rate cut
PBKPBKPBKPBK Stable Funding cost management
RHBRHBRHBRHB Lower Rate cut
HLBHLBHLBHLB Stable Funding cost management
AMMAMMAMMAMM Stable Funding cost management
AHBAHBAHBAHB Higher Funding cost management
AFGAFGAFGAFG Stable Funding cost management
Source: Companies, DBS Bank, AllianceDBS
Deposit competition is not as intense as before.Deposit competition is not as intense as before.Deposit competition is not as intense as before.Deposit competition is not as intense as before. We still expect
competition for deposits to surface seasonally (especially in
December as the liquidity coverage ratio requirement is bumped
up by 10% every year), but it is not expected to be as intense as
before. On the ground, fixed deposit campaigns are less
prevalent as it was at end-2015. The intensity has softened as
weaker loan growth traction has eased off pressure to gather
deposits aggressively.
Malaysian Banks: Loan and deposit growth
Source: BNM, DBS Bank, AllianceDBS
CIMB to face more NIM compression; AMMB’s to increase from CIMB to face more NIM compression; AMMB’s to increase from CIMB to face more NIM compression; AMMB’s to increase from CIMB to face more NIM compression; AMMB’s to increase from
a a a a low base.low base.low base.low base. Of the lot, we think NIM pressure is more
pronounced for CIMB (forecasting -10bps y-o-y as opposed to
industry's -2bps y-o-y) as the bank is shifting its focus to higher-
quality loans which are tagged with lower yields, particularly in
Indonesia. We are expecting higher NIMs (+4bps y-o-y) for
AMMB after a pronounced decline in FY16 (-36bps y-o-y). Recall
that AMMB’s NIM was negatively impacted from higher cost of
funds and its portfolio rebalancing strategy which targeted
better quality loans. Based on our sensitivity analysis, every 10-
bp decline in NIM impacts the banks’ net profit by -6% to -9%.
Sensitivity analysis: 10-bp decline in NIM
FY17 (Current)FY17 (Current)FY17 (Current)FY17 (Current) FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised) Change in Change in Change in Change in earningsearningsearningsearnings
NIMNIMNIMNIM Net profitNet profitNet profitNet profit NIMNIMNIMNIM Net profitNet profitNet profitNet profit
AHB 1.90% 507.7 1.80% 459.8 -9%
AMMB 2.07% 1,251.7 1.97% 1,164.1 -7%
CIMB 2.16% 3,997.9 2.06% 3,633.3 -9%
HLB 1.87% 2,265.5 1.77% 2,114.0 -7%
MAY 2.28% 6,832.4 2.18% 6,306.9 -8%
PBK 2.05% 5,588.1 1.95% 5,274.2 -6%
RHB 1.94% 2,246.7 1.84% 2,056.5 -8%
Source: DBS Bank, AllianceDBS
70
72
74
76
78
80
82
84
86
88
90
(2)
0
2
4
6
8
10
12
14
16
Jan-09
May-09
Sep
-09
Jan-10
May-10
Sep
-10
Jan-11
May-11
Sep
-11
Jan-12
May-12
Sep
-12
Jan-13
May-13
Sep
-13
Jan-14
May-14
Sep
-14
Jan-15
May-15
Sep
-15
Jan-16
May-16
Sep
-16
%
Loan growth (LHS) Deposits growth (LHS) Loan-to-deposit ratio
OctOctOctOct----16:16:16:16:Loan growth: 4.5% y-o-yDeposit growth: 2.8% y-o-yLoan-to-deposit ratio: 90%
Industry Focus
Malaysian Banks
Page 8
Valuation and recommendation
What has been priced in?What has been priced in?What has been priced in?What has been priced in? Malaysian banks are trading at 10-
year trough valuations, pricing in concerns of further ROE de-
rating from a significant blow-up in asset quality. While this is
not our base-case view, we believe this remains the critical
factor in determining share price performance in the year to
come.
Malaysian banks: Forward-rolling P/BV band vs ROE
Source: Bloomberg Finance L.P, DBS Bank, AllianceDBS
WorstWorstWorstWorst----case scenario would see 1% earnings growth.case scenario would see 1% earnings growth.case scenario would see 1% earnings growth.case scenario would see 1% earnings growth. At a
worst-case scenario analysis of 3% loan growth, 10-bp
compression and credit cost of 40bps, our back-of-the-envelope
calculation estimates an 8% downside to our current base-case
earnings forecast. This would slash earnings growth to 1% (vs
11% in our base case), indicating another year of muted
earnings growth. With that, ROE would likely be a tad bit lower
than current year levels.
Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our
top picks.top picks.top picks.top picks. In view of the challenging operating environment, we
continue to favour banks with defensive attributes, i.e. PBK and
HLB. Both banks have strong asset-quality attributes and are
expected to see loan growth driven by mortgages from strong
pipelines built up previously.
Malaysian banks: Peer comparison
Banking GroupBanking GroupBanking GroupBanking Group Market Market Market Market capcapcapcap
PricePricePricePrice Target Target Target Target PricePricePricePrice
RatingRatingRatingRating PE (x)PE (x)PE (x)PE (x) CAGRCAGRCAGRCAGR P/BV (x)P/BV (x)P/BV (x)P/BV (x) ROE (%)ROE (%)ROE (%)ROE (%) Net div Net div Net div Net div (%)(%)(%)(%)
(US$bn)(US$bn)(US$bn)(US$bn) (RM/s)(RM/s)(RM/s)(RM/s) (RM/s)(RM/s)(RM/s)(RM/s) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F ^ (%)^ (%)^ (%)^ (%) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F CY16FCY16FCY16FCY16F CY16FCY16FCY16FCY16F
Affin HoldingsAffin HoldingsAffin HoldingsAffin Holdings
1,012 2.30 2.00 FULLY
VALUED 12.1x 9.0x 8.8x 17.3 0.5x 0.5x 0.5x 5.8% 4.5% Alliance*Alliance*Alliance*Alliance* 1,333 3.86 NA NA 11.4x 11.4x 11.0x 1.7 1.3x 1.2x 1.2x 10.9% 4.1% AMMBAMMBAMMBAMMB 2,887 4.23 4.50 HOLD 9.1x 10.0x 9.4x -1.8 0.9x 0.8x 0.8x 8.3% 4.5% CIMB GroupCIMB GroupCIMB GroupCIMB Group 9,316 4.64 4.80 HOLD 13.8x 11.2x 10.1x 16.8 1.0x 0.9x 0.8x 8.6% 4.3% Hong LeongHong LeongHong LeongHong Leong 6,263 13.48 15.00 BUY 13.9x 14.1x 12.3x 6.1 1.5x 1.3x 1.3x 10.2% 3.0% MaybankMaybankMaybankMaybank 18,185 7.88 7.50 HOLD 11.0x 13.1x 11.9x -3.7 1.2x 1.2x 1.2x 10.0% 5.9% Public BankPublic BankPublic BankPublic Bank 17,152 19.62 22.60 BUY 15.0x 14.9x 13.6x 5.1 2.4x 2.2x 2.0x 15.7% 2.9% RHB BankRHB BankRHB BankRHB Bank 3,334 4.79 5.40 BUY 8.9x 9.7x 8.7x 1.5 0.8x 0.8x 0.7x 8.6% 3.4% Weighted averageWeighted averageWeighted averageWeighted average 12.7x12.7x12.7x12.7x 12.7x12.7x12.7x12.7x 13.0x13.0x13.0x13.0x 11.8x11.8x11.8x11.8x 3.93.93.93.9 1.5x1.5x1.5x1.5x 1.4x1.4x1.4x1.4x 1.3x1.3x1.3x1.3x 11.2%11.2%11.2%11.2% Weighted average (exWeighted average (exWeighted average (exWeighted average (ex----Public Public Public Public Bank)Bank)Bank)Bank)
11.7x11.7x11.7x11.7x 11.8x11.8x11.8x11.8x 12.2x12.2x12.2x12.2x 11.0x11.0x11.0x11.0x 3.53.53.53.5 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 1.0x1.0x1.0x1.0x 9.4%9.4%9.4%9.4%
Simple averageSimple averageSimple averageSimple average 11.9x11.9x11.9x11.9x 11.9x11.9x11.9x11.9x 11.7x11.7x11.7x11.7x 10.7x10.7x10.7x10.7x 5.45.45.45.4 1.2x1.2x1.2x1.2x 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 10.0%10.0%10.0%10.0% Simple average (exSimple average (exSimple average (exSimple average (ex----Public Bank)Public Bank)Public Bank)Public Bank) 11.4x11.4x11.4x11.4x 11.5x11.5x11.5x11.5x 11.2x11.2x11.2x11.2x 10.3x10.3x10.3x10.3x 5.45.45.45.4 1.0x1.0x1.0x1.0x 1.0x1.0x1.0x1.0x 0.9x0.9x0.9x0.9x 9.4%9.4%9.4%9.4%
BIMBBIMBBIMBBIMB 1,536 4.27 NA NR 11.8x 12.0x 11.5x 1.6 1.9x 1.8x 1.6x 17.2% 2.9% Hong Leong Financial Hong Leong Financial Hong Leong Financial Hong Leong Financial GroupGroupGroupGroup 3,848 14.84 17.00 BUY 10.9x 11.4x 10.0x 4.4 1.1x 1.1x 1.0x 10.0% 2.9%
* Based on Bloomberg consensus
^ Refers to a 2-year EPS CAGR for CY15-17F
Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS
0
2
4
6
8
10
12
14
16
18
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
06 07 08 09 10 11 12 13 14 15 16
%%%%xxxx
P/B (LHS) ROE (RHS)
Industry Focus
Malaysian Banks
Page 9
Malaysian banks: Summary of valuations and recommendations
TP and TP and TP and TP and GGM GGM GGM GGM BankBankBankBank RecRecRecRec basisbasisbasisbasis asmpt.asmpt.asmpt.asmpt. %%%% Key pointsKey pointsKey pointsKey points
PBK Buy RM22.60 ROE 16 Investment thesis: Most efficient bank with resilient earnings growth, lowest cost-to-income ratio and solid asset quality
2.3x CY17 BV growth 4 Catalyst: Sustainable and robust earnings delivery
16x CY17 EPS COE 9 Risk: Failure to sustain better-than-industry growth and asset quality
HLB Buy RM15.00 ROE 11 Investment thesis: Underappreciated franchise with strong liquidity position, promising earnings outlook and removed capital overhang
1.4x CY17 BV growth 4 Catalyst: Improved earnings traction
14x CY17 EPS COE 9 Risk: Slower-than-expected materialisation of growth plans
RHB Buy RM5.40 ROE 10 Investment thesis: Better earnings traction from cost savings, but to re-rate beyond 1x BV, we would need a pick-up in business growth on a more sustainable basis and asset quality concerns to taper off
0.8x CY17 BV growth 4 Catalyst: Cleaner corporate structure with improved ROE traction and materialisation of IGNITE initiatives
10x CY17 EPS COE 11 Risk: Asset quality issues
HLFG Buy RM17.00 HLB TP Investment thesis: Potential corporate streamlining to eliminate administrative overlaps and reduce regulatory compliance costs
1.2x CY17 BV HLA 2x BV Catalyst: Potential privatisation and corporate streamlining
12x CY17 EPS HLC 1x BV Risk: Drawing new growth levers may be challenging, given the softer operating environment
MAY Hold RM7.50 ROE 11 Investment thesis: Staying cautious on susceptibility to weakness in the oil & gas sector
1.1x CY17 BV growth 4 Catalyst: Recovery in asset quality and regional operations
12x CY17 EPS COE 10 Risk: Faster-than-expected recoveries may pose upside risk to our earnings forecast
CIMB Hold RM4.80 ROE 10 Investment thesis: Valuation expected to stay range-bound until clearer pick-up in core earnings momentum is seen
0.9x CY17 BV growth 5 Catalyst: Delivery of new strategic targets
11x CY17 EPS COE 11 Risk: Quicker-than-expected delivery of its T18 strategies would prove our bearish view wrong
AMMB Hold RM4.50 ROE 9 Investment thesis: Challenging earnings outlook given the ongoing portfolio rebalancing initiatives
0.8x CY17 BV growth 3 Catalyst: Improved earnings traction
10x CY17 EPS COE 10 Risk: Inability to grow balance sheet efficiently
Affin Fully RM2.00 ROE 6 Investment thesis: Limited growth potential with weak underlying trends YTD
Valued 0.4x CY17 BV growth 3 Catalyst: New earnings driver
8x CY17 EPS COE 10 Risk: Significant turnaround in its financials and improved asset quality conditions would prove our negative view wrong
Source: DBS Bank, AllianceDBS
Malaysian Banks: 3QCY16 results snapshot
Source: DBS Bank, AllianceDBS
BankBankBankBank F inanc ialF inanc ialF inanc ialF inanc ial v s ourv s ourv s ourv s our v s consensusv s consensusv s consensusv s consensus
quartersquartersquartersquarters est imatesest imatesest imatesest imates est imatesest imatesest imatesest imates
RMRMRMRM RMRMRMRM
Affin 3QFY16 Above Above Yes (▲) Earnings beat expectations on lower
than expected credit cost
◄► Fully Valued Fully Valued ▲ 1.90 2.00
AFG 2QFY17 NA Inline N/A NANANANA NR NR NANANANA NA NA
AMMB 2QFY17 Inline Inline Yes (▼) Lower loan and deposit growth
assumption
◄► Hold Hold ▼ 4.60 4.50
CIMB 3QFY16 Inline Below No ◄► Hold Hold ◄► 4.80 4.80
HLB 1QFY17 Inline Inline No ◄► Buy Buy ◄► 15.00 15.00
MAY 3QFY16 Inline Inline Yes (▲) Lower loan and deposit growth
assumption. Imputing one off gains for
FY16.
◄► Hold Hold ◄► 7.50 7.50
PBK 3QFY16 Inline Inline Yes (▼) Revise earnings on softer non-interest
income
◄► Buy Buy ◄► 22.60 22.60
RHB 3QFY16 Inline Inline Yes (▼) Lower loan growth and higher credit
cost assumptions.
◄► Buy Buy ▼ 5.50 5.40
HLFG 1QFY17 Inline Inline No Lower TP as we reinstate the historical
average holding company discount
◄► Buy Buy ▼ 18.00 17.00
BIMB 3QFY16 NA Inline N/A ◄► Hold Hold NANANANA NA NA
Rev ised Rev ised Rev ised Rev ised
TPTPTPTP
Call Call Call Call
ChangeChangeChangeChange
Prev ious Prev ious Prev ious Prev ious
CallCallCallCall Rev ised CallRev ised CallRev ised CallRev ised Call
TP TP TP TP
ChangeChangeChangeChange
Prev ious Prev ious Prev ious Prev ious
TPTPTPTP
Reasons for earnings v ariat ion and Reasons for earnings v ariat ion and Reasons for earnings v ariat ion and Reasons for earnings v ariat ion and
comment on earnings rev isioncomment on earnings rev isioncomment on earnings rev isioncomment on earnings rev ision
Earnings Earnings Earnings Earnings
rev isionrev isionrev isionrev ision
Industry Focus
Malaysian Banks
Page 10
Net profitNet profitNet profitNet profit
3Q16 sector net profit increased by 9% y-o-y/ 20% q-o-q, lifted mainly by lower provisions.
PrePrePrePre----provision profitprovision profitprovision profitprovision profit
Pre-provision profits were higher by 3% y-o-y as revenue was flat while expenses declined. On a q-o-q basis, it was flattish as higher revenues were offset by higher expenses.
NonNonNonNon----interest income interest income interest income interest income
Non-interest income trend were mixed. Swings were mainly attributable to trading and forex income. CIMB’s non-interest income includes a one-off gain from the sale of stake in Sun Life insurance.
NonNonNonNon----interest income to total revenueinterest income to total revenueinterest income to total revenueinterest income to total revenue
Consequently, non-interest income-to-total income ratios trended differently across the banks.
NIMNIMNIMNIM
Despite a cut in Base Rate during the quarter, most banks managed to sustain NIM levels. Source: Companies, DBS Bank, AllianceDBS
CostCostCostCost----totototo----income ratioincome ratioincome ratioincome ratio
CIMB and RHB reported y-o-y improvement in cost-to-income ratio, thanks to better cost containment. PBK’s ratio remains the best in class.
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
AMMB Affin AFG CIMB HLB MAY PBK RHB
Net profit (RM m)
3Q15 4Q15 1Q16 2Q16 3Q16
500
1,000
1,500
2,000
2,500
3,000
3,500
AMMB Affin AFG CIMB HLB MAY PBK RHB
Pre-provision profit (RM m)
3Q15 4Q15 1Q16 2Q16 3Q16
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
AMMB Affin AFG CIMB HLB MAY PBK RHB
Non-interest income (RM m)
3Q15 4Q15 1Q16 2Q16 3Q16
32%
32%
25% 27%
24%
31%
26% 28%
33%
34%
23%
29%
26%
31%
26%
34%36%
32%
23%
24%
23%
28%
24%
30%
38%
34%
23%
29%
27%
27%
20%
32%
39%
37%
21%
28%
25%
30%
20%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
AMMB Affin AFG CIMB HLB MAY PBK RHB
Non-int income to total revenue
3Q15 4Q15 1Q16 2Q16 3Q16
2.15%
2.10%
2.19%
2.68%
1.78%
2.54%
2.13%
2.07%
2.20%
2.02%
2.04%
2.18%
2.70%
1.81%
2.41%
2.16%
2.12%
2.18%
1.91%
1.84%
2.07%
2.67%
1.74%
2.38%
2.18%
2.16%
2.12%
1.98%
1.98%
2.11%
2.60%
1.77%
2.38%
2.15%
2.06%
2.13%
2.01%
2.02%
2.16%
2.64%
1.85%
2.31%
2.16%
2.04%
2.15%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
NIM (incl Islamic banking income)
3Q15 4Q15 1Q16 2Q16 3Q16
54% 6
0%
45%
59%
45%
45%
30%
75%
52%
63%
60%
48% 5
5%
45% 49%
30%
57%
51%
69%
64%
51% 5
7%
47%
49%
31%
48% 52%57% 60%
46%
54%
46% 49%
33%
51%
49%5
6%
57%
47%
55%
45% 49%
33%
51%
49%
0%
10%
20%
30%
40%
50%
60%
70%
80%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Cost-to-income
3Q15 4Q15 1Q16 2Q16 3Q16
Industry Focus
Malaysian Banks
Page 11
Loan growth (qLoan growth (qLoan growth (qLoan growth (q----oooo----q)q)q)q)
Sector loans grew 2% in 3Q16. Loan growth momentum remains sluggish.
Deposit growth (qDeposit growth (qDeposit growth (qDeposit growth (q----oooo----q)q)q)q)
2% deposit growth q-o-q. AMMB reported a contraction in deposits.
Loan growth (yLoan growth (yLoan growth (yLoan growth (y----oooo----y)y)y)y)
Sector loan grew 2%. Banks are reporting loans growth at low single digits, with the exception of PBK (high single digit).
Deposit growth (yDeposit growth (yDeposit growth (yDeposit growth (y----oooo----y)y)y)y)
Sector deposit growth improved at 4% y-o-y.
Loan to Loan to Loan to Loan to deposit ratio (LDR)deposit ratio (LDR)deposit ratio (LDR)deposit ratio (LDR)
Industry loan-to-deposit ratio was stable at 90%. Source: Companies, DBS Bank, AllianceDBS
CASA to total depositsCASA to total depositsCASA to total depositsCASA to total deposits
Banks continue to focus on shoring up low-cost deposits (CASA) to fight NIM compression.
1%
0%
2%
6%
2%
7%
4%
3%
5%
0%
4%
2%
0%
2%
-1%
2%
1%
0%1
%
1%
0%
-3%
1%
-4%
1%
-1%
-1%-1%
-2%
-1%
3%
2% 2% 2%
1% 2%
0%
0%
2% 2%
0%
2%
2%
1% 2
%
-6%
-4%
-2%
0%
2%
4%
6%
8%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Loan growth (q-o-q)
3Q15 4Q15 1Q16 2Q16 3Q16
-1%
-7%
0%
5%
2%
5%
0% 1%
3%
2%
9%
-1%
2%
1%
0%
2%
-1%
1%
-1%
-1%
6%
0%
1%
-2%
2%
0% 0%
-4%
-7%
-2%
0%
2% 3
%
2%
4%
1%
-4%
6%
3%
7%
1%
0%
2%
1% 2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Deposit growth (q-o-q)
3Q15 4Q15 1Q16 2Q16 3Q16
0%
7%
10%
19%
11%
20%
13%
10%
15%
-1%
7% 8
%
13%
10% 12%
12%
6%
10%
0%
9%
5%
7% 7%
6%
10%
4%
6%
2% 3% 3%
6%
6%
4%
10%
5% 6%
1% 2% 3%
2%
4%
-1%
8%
2%
2%
-5%
0%
5%
10%
15%
20%
25%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Loan growth (y-o-y)
3Q15 4Q15 1Q16 2Q16 3Q16
5%
-6%
8%
18%
11%
14%
10%
7%
11%
1%
0%
5%
13%
10%
9% 9%
1%
8%
-2%
3% 3%
7% 7%
4%
7%
-1%
5%
-3%
-6%
2%
7%
6%
6%
5%
4% 5%
-7%
6%
5%
8%
4%
0%
7%
4%
4%
-10%
-5%
0%
5%
10%
15%
20%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Deposit growth (y-o-y)
3Q15 4Q15 1Q16 2Q16 3Q16
95%
90%
85% 93%
80%
96%
90%
93%
90%
94%
86%
88%
91%
81%
95%
90% 95%
90%96%
87%
83% 89%
80%
93%
90% 94%
89%
99%
92%
85% 92%
80%
93%
90%
91%
90%
103%
86%
84% 88%
80%
95%
90%
91%
90%
0%
20%
40%
60%
80%
100%
120%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
LDR
3Q15 4Q15 1Q16 2Q16 3Q16
21.1%
21.1%
33.6%
34.4%
24.9%
35.0%
24.7%
23.3%
20.4%
19.2%
35.0%
34.4%
25.5%
33.7%
24.2%
24.0%
20.7%
17.7%
32.1% 35.7%
24.4%
33.5%
23.4%
24.1%
24.5%
19.5%
32.9%
35.6%
25.3%
34.1%
23.6%
24.8%
21.9%
18.2%
32.9%
34.3%
24.8%
35.1%
23.7%
24.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
AMMB Affin AFG CIMB HLB MAY PBK RHB
CASA to total deposit
3Q15 4Q15 1Q16 2Q16 3Q16
Industry Focus
Malaysian Banks
Page 12
Credit costsCredit costsCredit costsCredit costs
Credit cost for MAY and RHB declined after a sharp spike in the previous quarter. AMMB continued to ride on recoveries.
Gross NPL ratioGross NPL ratioGross NPL ratioGross NPL ratio
PBK and HLB’s NPLs remain the best in class.
Absolute impaired loanAbsolute impaired loanAbsolute impaired loanAbsolute impaired loans (qs (qs (qs (q----oooo----q) q) q) q)
Absolute impaired loans continued to climb. Higher impaired loans at RHB was caused by two oil & gas accounts from Singapore while PBK’s was due to residential mortgage.
Absolute impaired loanAbsolute impaired loanAbsolute impaired loanAbsolute impaired loans (ys (ys (ys (y----oooo----y)y)y)y)
Absolute impaired loans growth slower, but remains elevated.
CET1, TierCET1, TierCET1, TierCET1, Tier----1 CAR and total CAR (as at 1 CAR and total CAR (as at 1 CAR and total CAR (as at 1 CAR and total CAR (as at 30 Sep30 Sep30 Sep30 Sep 2016) 2016) 2016) 2016)
Capital ratios remain relatively healthy.
Total CAR remains strongTotal CAR remains strongTotal CAR remains strongTotal CAR remains strong
MAY’s capital ratios strongly held up by its dividend reinvestment plan.
-0.07%
0.07%
0.05%
0.18%
0.02%
0.17%
0.04%
0.03%
-0.08%
0.05%
0.01%
0.24%
0.05%
0.11%
-0.04%
0.16%
-0.05% 0.00%
0.00%
0.18%
0.02%
0.20%
0.02%
0.05%
-0.04%
0.01% 0.05%
0.22%
-0.04%
0.26%
0.02%
0.21%
-0.04%
0.05%
0.04%
0.19%
0.02% 0
.07%
0.03%
0.09%
-0.10%
-0.05%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
AMMB Affin AFG CIMB HLB MAY PBK RHB
Credit cost
3Q15 4Q15 1Q16 2Q16 3Q16
2.0% 2.2%
1.2%
3.4%
0.8%
1.5%
0.5%
1.9%
1.9%
1.8%
1.9%
1.1%
3.0%
0.9%
1.9%
0.5%
1.9%
1.8%
1.9%
2.0%
1.3%
3.0%
0.8%
2.1%
0.5%
1.8%
1.9%
1.7% 2.0%
1.2%
3.2%
0.8%
2.3%
0.5%
2.1%
1.9%
1.6%
2.1%
0.9%
3.2%
0.8%
2.2%
0.5%
2.3%
1.9%
0%
1%
1%
2%
2%
3%
3%
4%
4%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Gross NPL ratio
3Q15 4Q15 1Q16 2Q16 3Q16
10.1%
8.8%
23.0%
10.0%
2.0% 5.9%
1.8%
-1.8%
6.8%
-7.9%
-11.0%
-9.6%
-10.7%
4.8%
19.4%
-4.7%
-2.3%
-0.3%
8.8%
5.0%
16.6%
-3.3%
-4.4%
9.1%
-1.2%
-4.0%
2.2%
-13.3%
-1.9%
-7.6%
7.2%
-1.3%
13.2%
3.6%
14.2%
7.6%
-3.2%
4.3%
-18.4%
3.8%
6.0%
-3.1%
7.6% 10.6%
1.5%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Absoulte NPL(q-o-q)
3Q15 4Q15 1Q16 2Q16 3Q16
9.7%
23.9%
12.1% 24.4%
-19.1%
12.5%
-8.0%
-6.7%
11.3%
-5.2%
11.6%
3.1% 11.0%
-3.6%
37.2%
-9.2% -1.8%
13.3%
8.1%
10.2%
28.1%
2.4%
-1.9%
49.0%
-6.0%
-6.2%
14.4%
-4.4%
-0.3%
19.8%
1.8%
0.9%
56.2%
-0.7%
5.3%
17.1%
-15.9% -4
.3%
-20.5%
-4.0%
4.8%
42.9%
5.0%
18.6%
11.4%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
Absolute NPL (y-o-y)
3Q15 4Q15 1Q16 2Q16 3Q16
16.5%
15.6%
16.8%
15.8%
14.8%
19.0%
15.2% 17.1%
12.9%
12.8%
12.2%
12.4%
13.3% 15.4%
11.9% 13.3%
11.9%
12.8%
12.2%
10.9%
12.9%
13.7%
11.0%
13.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
AMMB Affin AFG CIMB HLB MAY PBK RHB
Total CAR Tier 1 CAR CET1 CAR
15.6%
13.5%
13.6%
13.4%
13.7%
15.0%
14.8%
15.7%
14.4%
16.2%
14.3% 17.1%
15.4%
16.2%
17.7%
15.5%
14.7%
15.9%
16.1%
14.4% 17.4%
15.4%
15.7% 17.9%
15.2%
15.5%
16.0%
16.1%
14.9%
16.3%
15.6%
14.7%
19.2%
15.4%
17.2%
16.2%
16.5%
15.6%
16.8%
15.8%
14.8%
19.0%
15.2%
17.1%
16.4%
0%
5%
10%
15%
20%
25%
AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)
RWCAR
3Q15 4Q15 1Q16 2Q16 3Q16
Industry Focus
Malaysian Banks
Page 13
Malaysian Banks: 3QCY16 results (q-o-q and y-o-y comparison) Alliance Financial Group AMMB CIMB
RMm 2QFY17 2QFY16 1QFY17 y-o-y q-o-q 2QFY17 2QFY16 1QFY17 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q Net interest income 204 213 212 -4% -4% 373 432 392 -14% -5% 2,445 2,416 2,352 1% 4% Islamic banking income 78 61 67 29% 17% 201 200 197 1% 2% 425 386 413 10% 3% Non-interest income 77 92 84 -16% -9% 368 299 357 23% 3% 1,103 1,038 1,138 6% -3% Operating income 360 366 364 -2% -1% 943 931 947 1% 0% 3,974 3,840 3,903 3% 2% Operating expenses (167) (166) (169) 1% -1% (524) (500) (536) 5% -2% (2,193) (2,261) (2,091) -3% 5% Pre-provision profit 192 200 195 -4% -1% 419 432 411 -3% 2% 1,781 1,580 1,812 13% -2% Provisions & Impairments (17) (19) (19) -13% -13% 42 66 44 -36% -6% (586) (529) (657) 11% -11% Associates 0 0 0 nm nm 11 4 5 187% 139% 16 24 34 nm nm Pre-tax profit 176 181 175 -3% 0% 472 501 479 -6% -2% 1,361 1,075 1,189 27% 14% Net profit 133 135 132 -2% 0% 353 383 323 -8% 9% 1,023 804 873 27% 17% NIM (%) 2.16 2.19 2.11 (0.03) 0.04 2.01 2.15 1.98 (0.14) 0.02 2.64 2.68 2.60 (0.04) 0.04 Cost-to-income (%) 46.5 45.4 46.5 1.1 0.0 55.6 53.7 56.6 2.0 (1.0) 55.2 58.9 53.57 (3.7) 1.6 ROE (%) 10.6 11.8 10.9 (1.1) (0.2) 9.1 10.3 8.4 (1.3) 0.7 9.50 8.20 8.4 1.3 1.1 ROA (%) 1.0 1.0 1.0 (0.1) 0.0 1.1 1.2 1.0 (0.0) 0.1 0.9 0.7 0.7 0.2 0.1 Gross NPL ratio (%) 0.9 1.2 1.2 (0.3) (0.2) 1.6 2.0 1.7 (0.3) (0.1) 3.2 3.4 3.2 (0.2) 0.0 Loan loss coverage (%) 101.9 85.5 83.9 16.4 18.0 83.5 92.6 81.2 (9.1) 2.3 80.6 76.6 83.5 4.0 (3.0) LD ratio (%) 83.9 85.4 84.9 (1.5) (1.0) 103.4 95.5 99.0 7.9 4.4 88.1 93.3 91.7 (5.2) (3.6) CET-1(%) 12.2 11.7 11.7 0.4 0.4 11.9 10.6 11.2 1.3 0.7 10.9 9.3 10.9 1.6 0.0 Tier-1 CAR (%) 12.2 11.7 11.7 0.4 0.4 12.9 11.8 12.2 1.1 0.7 12.4 10.6 12.2 1.8 0.2 RWCAR (%) 16.8 13.6 16.3 3.1 0.5 16.5 15.6 16.1 0.9 0.4 15.8 13.4 15.6 2.4 0.2 Net loans 38,775 37,607 38,136 3% 2% 86,068 85,270 85,807 1% 0% 296,786 290,109 290,064 2% 2% Deposits 46,230 44,055 44,920 5% 3% 83,242 89,280 86,710 -7% -4% 336,586 310,810 315,998 8% 7% Gross NPLs/Impaired Loans 368 463 451 -21% -18% 1,427 1,697 1,474 -16% -3% 9,769 10,172 9,414 -4% 4% Positives NA Stable NIM. Decline in impaired loans. Higher CET1. Higher non-interest income and Islamic banking income.
Largely stable asset quality indicators. Expenses contained.
Disappointments NA Loan growth remains dampened by auto portfolio contraction. Deposits contracted.
Lower NIM. High provisions. Softer associate contribution.
Prospects NA AMMB is targeting to achieve 8.5% to 9% ROE in FY17, driven by lower expenses (targeting ≤57%) and sustained recoveries. Volatility in the market and the levels of recoveries are key factors that may derail target.
At the current run rate, management expects ROE and loan growth to more likely reach 9% and 6% respectively. CIMB remains on track to hit its 12% CET1 ratio target by 2018 and cost-to-income ratio target of 53% for 2016.
Link to report NA AMMB: Tracking expectations well CIMB: Falling short of targets
Source: Company announcements, DBS Bank, AllianceDBS
Industry Focus
Malaysian Banks
Page 14
Malaysian Banks: 3QCY16 results (q-o-q and y-o-y comparison) (cont’d) Hong Leong Bank Maybank Public Bank
RMm 1QFY17 1QFY16 4QFY16 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q Net interest income 690 660 663 5% 4% 2,828 2,897 2,879 -2% -2% 1,736 1,629 1,700 7% 2% Islamic banking income 130 115 121 13% 7% 1,009 1,085 1,037 -7% -3% 249 211 233 18% 7% Non-interest income 276 249 295 11% -6% 1,621 1,766 1,430 -8% 13% 482 631 492 -24% -2% Operating income 1,096 1,023 1,079 7% 2% 5,458 5,747 5,346 -5% 2% 2,467 2,471 2,425 0% 2% Operating expenses (491) (463) (494) 6% -1% (2,700) (2,601) (2,624) 4% 3% (815) (741) (803) 10% 1% Pre-provision profit 606 560 585 8% 4% 2,758 3,146 2,722 -12% 1% 1,652 1,730 1,622 -4% 2% Provisions (26) (21) 54 nm nm (331) (797) (1,181) -58% -72% (94) (117) (69) -20% 69% Associates 95 85 85 12% 12% 29 34 43 -15% -32% (0) 1 (1) -153% -163% Pre-tax profit 675 625 724 8% -7% 2,456 2,383 1,584 3% 55% 1,558 1,614 1,552 -3% 0% Net profit 543 503 559 8% -3% 1,796 1,899 1,160 -5% 55% 1,238 1,201 1,256 3% -1% NIM (%) 1.85 1.78 1.77 0.08 0.08 2.31 2.54 2.38 (0.24) (0.07) 2.16 2.13 2.15 0.03 0.02 Cost-to-income (%) 44.8 45.2 45.8 (0.5) (1.0) 49.5 45.3 49.1 4.2 0.4 33.0 30.0 33.1 3.0 (0.1) ROE (%) 10.1 11.6 10.8 (1.5) (0.7) 11.1 13.1 7.4 (1.9) 3.7 15.2 16.3 15.8 (1.1) (0.6) ROA (%) 1.1 1.1 1.2 0.1 (0.0) 1.0 1.1 0.7 (0.1) 0.3 1.3 1.3 1.3 (0.0) (0.0) Gross NPL ratio (%) 0.8 0.8 0.8 0.0 0.0 2.2 1.5 2.3 0.7 (0.1) 0.5 0.5 0.5 (0.0) 0.0 Loan loss coverage (%) 112.6 131.0 119.8 (18.4) (7.2) 74.8 85.4 70.5 (10.5) 4.3 109.5 130.8 116.3 (21.2) (6.8) LD ratio (%) 80.3 80.1 80.4 0.1 (0.2) 95.0 96.0 92.6 (1.0) 2.4 90.2 89.8 90.5 0.3 (0.3) CET-1 (%) 12.9 10.5 12.7 2.3 0.1 13.7 11.2 13.8 2.5 (0.1) 11.0 10.2 11.1 0.8 (0.1) Tier-1 CAR (%) 13.3 11.6 13.1 1.6 0.1 15.4 12.8 15.5 2.6 (0.1) 11.9 11.4 12.0 0.5 (0.1) RWCAR (%) 14.8 13.7 14.7 1.1 0.1 19.0 15.0 19.2 4.0 (0.1) 15.2 14.8 15.4 0.4 (0.2) Net loans 119,835 115,063 119,458 4% 0% 453,778 458,464 443,886 -1% 2% 286,634 266,194 281,852 8% 2% Deposits 149,273 143,566 148,524 4% 1% 477,513 477,493 479,125 0% 0% 317,935 296,339 311,535 7% 2% Gross NPLs/Impaired Loans 1,014 967 957 5% 6% 10,240 7,167 10,568 43% -3% 1,488 1,418 1,383 5% 8% Positives Strong treasury income. NIM expansion. Decent loan and
deposit growth. Improved associate contribution. Stronger trading and forex income. Minimal NIM slippage. Higher loan loss coverage ratio.
Higher-than-industry loan and deposit growth. Stable NIM and NPL ratio. Best-in-class cost efficiency.
Disappointments Provisions normalised. Muted loan and deposit growth. Increased oil & gas exposure.
Increase in impaired loans from its Laos operations.
Prospects FY17F targets appear to skew towards a cautious mode with loan growth expected to track industry levels. Deposits would likely grow at the same pace. ROE target at 10-11%.
MAY has toned down guidance across the board and now expects loan growth of 2-3%, deposit growth of 3-4% and ROE of 10.5-11%.
In the event of further cuts in OPR, NIM pressure may be more pronounced than expected. During the quarter, PBK's NIM held up well despite the OPR cut in July.
Link to report Hong Leong Bank: Growing from strength to strength Maybank: Much ado about oil and gas Public Bank: The exception to the rule
Source: Company announcements, DBS Bank, AllianceDBS
Industry Focus
Malaysian Banks
Page 15
Malaysian Banks: 3QCY16 results (q-o-q and y-o-y comparison) (cont’d) RHB Bank Affin Holdings Banks under coverage - Cumulative
RMm 3QFY16 3QFY15 2QFY16 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q 2QCY16 2QCY15 1QCY16 y-o-y q-o-q Net interest income 849 877 853 -3% 0% 247 248 247 -1% 0% 9,373 9,371 9,298 0% 1% Islamic banking income 234 230 227 2% 3% 69 63 65 10% 6% 2,396 2,351 2,361 2% 1% Non-interest income 546 439 509 24% 7% 189 149 164 27% 15% 4,663 4,663 4,469 0% 4% Operating income 1,629 1,546 1,589 5% 3% 504 460 477 10% 6% 16,431 16,385 16,128 0% 2% Operating expenses (827) (1,166) (808) -29% 2% (288) (275) (287) 5% 0% (8,005) (8,172) (7,811) -2% 2% Pre-provision profit 803 380 781 111% 3% 216 185 189 17% 14% 8,426 8,212 8,317 3% 1% Provisions (140) (51) (312) 176% -55% (22) (30) (2) -25% 924% (1,174) (1,498) (2,142) -22% -45% Associates 0 0 0 -15% -61% 6 4 13 46% -55% 157 152 178 3% -12% Pre-tax profit 663 329 469 101% 41% 186 149 186 24% 0% 7,546 6,856 6,358 10% 19% Net profit 505 229 350 120% 44% 140 102 137 36% 2% 5,730 5,256 4,791 9% 20% NIM (%) 2.04 2.07 2.06 (0.03) (0.03) 2.02 2.10 1.98 (0.08) 0.04 2.15 2.20 2.13 (0.06) 0.02 Cost-to-income (%) 50.7 75.4 50.9 (24.7) (0.1) 57.2 59.7 60.3 (2.56) (3.11) 49.1 51.7 49.5 (2.6) (0.4) ROE (%) 9.4 3.8 6.3 5.6 3.2 6.4 5.1 6.4 1.38 (0.01) 10.2 10.0 9.3 0.2 0.9 ROA (%) 0.9 0.3 0.6 0.5 0.3 0.8 0.6 0.8 0.19 0.03 1.0 0.9 0.9 0.1 0.1 Gross NPL ratio (%) 2.3 1.9 2.1 0.3 0.2 2.1 2.2 2.0 (0.13) 0.09 1.7 1.7 1.7 0.0 0.0 Loan loss coverage (%) 56.4 56.5 59.0 (0.2) (2.6) 59.7 61.2 65.2 (1.49) (5.46) 84.9 89.9 84.9 (5.1) (0.0) LD ratio (%) 91.0 93.0 91.3 (2.1) (0.3) 86.5 90.2 91.9 (3.72) (5.47) 89.8 90.4 90.3 (0.6) (0.5) CET-1(%) 13.0 11.9 13.0 1.1 (0.0) 12.8 12.2 12.1 0.57 0.70 12.3 11.0 12.1 1.3 0.2 Tier-1 CAR (%) 13.3 12.3 13.3 1.0 (0.1) 12.8 12.2 12.1 0.57 0.70 13.0 11.8 12.8 1.2 0.2 RWCAR (%) 17.1 15.7 17.2 1.5 (0.1) 16 13.514 14.9 2.04 0.68 16.4 14.4 16.2 1.9 0.2 Net loans 151,009 147,879 149,862 2% 1% 42,601 41,817 42,745 2% 0% 1,475,486 1,442,402 1,451,809 2% 2% Deposits 165,999 158,968 164,141 4% 1% 49,264 46,362 46,490 6% 6% 1,626,042 1,566,872 1,597,443 4% 2% Gross NPLs/Impaired Loans 3,446 2,907 3,117 19% 11% 897 937 860 -4% 4% 28,649 25,727 28,223 11% 2% Positives Improvement in cost efficiency. Higher trading income. Higher write-backs and lower provisions. Higher NIM.
Disappointments High provisions, higher impaired loans, lower loan loss coverage. Lower NIM. Sluggish loan growth.
No signs of asset quality moderation. Uninspiring loan and deposit growth.
Prospects We expect FY16F ROE to stay below its target of 10%, but we see RHB's improved cost efficiency as a bright spot for the bank. NPL ratio of <2% would be a challenge to reach if some of its oil & gas borrowers decide to restructure or reschedule loans.
Continue to take a cautious stance on provisions due to limited improvement in asset quality indicators.
Link to report RHB Bank: Keep watch on asset quality Affin Holdings: Asset quality still a concern
Source: Company announcements, DBS Bank, AllianceDBS
Industry Focus
Malaysian Banks
Page 16
Company GuidesCompany GuidesCompany GuidesCompany Guides
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM2.30 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM2.00 (13% downside) (Prev RM2.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: New earnings driver
Where we differ:Where we differ:Where we differ:Where we differ: Post earnings adjustment, our foreast is higher than
consensus, presumably on lower credit cost assumption Analyst Lynette CHENG +60 32604 3907 [email protected] Sue Lin LIM +65 8332 6843 [email protected]
What’s New • 3Q/9M16 earnings above expectation as
provisions were lower than expected
• Asset-quality indicators remain weak with absolute impaired loans increasing q-o-q and loan loss coverage at a low of 60%
• Raising earnings by 8-11% on lower credit cost assumption
• Maintain FULLY VALUED with higher TP of RM2.00
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Pre-prov. Profit 676 704 734 802 Net Profit 369 495 508 547 Net Pft (Pre Ex.) 369 495 508 547 Net Pft Gth (Pre-ex) (%) (37.7) 33.9 2.7 7.8 EPS (sen) 19.0 25.5 26.1 28.2 EPS Pre Ex. (sen) 19.0 25.5 26.1 28.2 EPS Gth Pre Ex (%) (38) 34 3 8 Diluted EPS (sen) 19.0 25.5 26.1 28.2 PE Pre Ex. (X) 12.1 9.0 8.8 8.2 Net DPS (sen) 7.99 10.2 10.5 11.3 Div Yield (%) 3.5 4.4 4.5 4.9 ROAE Pre Ex. (%) 4.6 5.9 5.8 6.0 ROAE (%) 4.6 5.9 5.8 6.0 ROA (%) 0.6 0.8 0.7 0.8 BV Per Share (sen) 426 442 457 474 P/Book Value (x) 0.5 0.5 0.5 0.5 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 23.4 24.1 25.4
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 2 S: 4 H: 2
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.
Asset-quality concern remains In a tight spotIn a tight spotIn a tight spotIn a tight spot, FULLY VALUED, FULLY VALUED, FULLY VALUED, FULLY VALUED.... YTD earnings improvement was driven by lower credit cost; despite no signs of improvements in asset quality (absolute impaired loans increased 7% YTD, loan loss coverage at lowest level since 2010). Separately, growth appears to be challenging as YTD loan and deposit growth remains in negative territory at -3% and -2%, respectively. We keep our view that the stock would likely continue to trade
below BV given its weaker fundamentals vs peers.
3333Q/Q/Q/Q/9M9M9M9M16 16 16 16 earningsearningsearningsearnings beatbeatbeatbeat expectations expectations expectations expectations as provisions as provisions as provisions as provisions stayed low.stayed low.stayed low.stayed low. At the pre-provision level, earnings met expectations. Net interest income came in flat q-o-q despite lower cost of funds, as loan growth was benign at -0.4% q-o-q/1.8% y-o-y. Non-interest income was boosted by higher forex and trading gains. Cost-to-income ratio ran lower due to the higher income growth. Affin continued to enjoy low provisions on its loan portfolio (thanks to write backs), but incurred provisions for its
securities portfolio to the tune of RM19m.
Raised earnings Raised earnings Raised earnings Raised earnings on lower credit cost assumon lower credit cost assumon lower credit cost assumon lower credit cost assumptionptionptionption.... Asset-quality indicators remain weak as absolute impaired loans increased q-o-q, while loan loss coverage slid to 60%. However, given that Affin appears comfortable with the current level of loan loss coverage, we are lowering our credit cost assumption to 10/13/15bps across FY16-18F (vs 17bps each previously). As a result, earnings were raised by 8-11% and TP was adjusted to
RM2.00.
Valuation: Our RM2.00 TP implies 0.4x FY17F BV and is derived from the Gordon Growth Model. This assumes 6% ROE, 10% cost of equity and 3% growth. We expect weak underlying trends to remain a drag on its share price performance.
Key Risks to Our View: A significant turnaround.A significant turnaround.A significant turnaround.A significant turnaround. We have imputed a weak set of earnings estimates and ascribed a low valuation multiple to the bank. Its current state with weak asset quality has been accounted for. A significant turnaround in its financials and improved asset-quality conditions would prove our view wrong.
At A Glance Issued Capital (m shrs) 1,943
Mkt. Cap (RMm/US$m) 4,469 / 1,005
Major Shareholders (%)
LTAT (%) 35.2 Bank of East Asia (%) 23.5 Boustead (%) 20.7 Free Float (%) 13.1
3m Avg. Daily Val (US$m) 0.17
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
Affin Holdings Berhad Version 5 | Bloomberg: AHB MK | Reuters: AFIN.KL Refer to important disclosures at the end of this report
58
78
98
118
138
158
178
198
218
1.9
2.4
2.9
3.4
3.9
4.4
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
Affin Holdings Berhad (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 18
Company Guide
Affin Holdings Berhad
WHAT’S NEW
Provisions lower than expected but asset-quality remains a concern
HighlightsHighlightsHighlightsHighlights
Affin’s 3Q/9MFY16 earnings came in above Affin’s 3Q/9MFY16 earnings came in above Affin’s 3Q/9MFY16 earnings came in above Affin’s 3Q/9MFY16 earnings came in above our our our our expectations, expectations, expectations, expectations,
on loweron loweron loweron lower----thanthanthanthan----expected provisions.expected provisions.expected provisions.expected provisions. Pre-provision profits were
within expectations. On a q-o-q basis, earnings were flattish.
Although NIM was higher q-o-q (from lower cost of funds),
net interest income was flattish as loan growth remains
muted at -0.4% q-o-q/1.8% y-o-y/-2% YTD. Non-interest
income was boosted by higher forex and trading gains. Cost-
to-income ratio ran lower due to the higher income growth.
Affin continued to enjoy low provisions on its loan portfolio
(thanks to write backs), but incurred provisions for its
securities portfolio to the tune of RM19m. Deposit growth
was higher at 6% for both q-o-q and y-o-y, but contracted
-3% YTD due to the significant increase in 4QFY15.
Uptick in impaired loans.Uptick in impaired loans.Uptick in impaired loans.Uptick in impaired loans. Asset-quality indicators remain weak
as absolute impaired loans increased 4% q-o-q, largely led by
working capital loans (+21% q-o-q). Impaired loans ratio
inched up to 2.1% (from 2.0% in 2QFY16). Loan loss
coverage slid to 60% (87% including regulatory reserve).
Capital ratios remain strong with CET1/Tier-1/Total Capital
ratios of 12.8%/12.8%/15.6%. Affin declared an interim DPS
of 3 sen.
OutlookOutlookOutlookOutlook
Raised earnings by 8Raised earnings by 8Raised earnings by 8Raised earnings by 8----11111111% % % % on lower credit cost assumptionon lower credit cost assumptionon lower credit cost assumptionon lower credit cost assumption....
Given that Affin appears comfortable with the current level of
loan loss coverage, we are lowering our credit cost
assumption to 10/13/15bps across FY16-18F (vs 17bps each
previously).
In search for stability.In search for stability.In search for stability.In search for stability. In this current uncertain environment,
we continue to favour banks with more steady and
conservative asset-quality indicators. YTD earnings
improvement was driven by lower credit cost; despite no
signs of improvements in asset quality (absolute impaired
loans increased 7% YTD, loan loss coverage at lowest level
since 2010). We would turn less negative on Affin when signs
of asset quality stabilisation and clarity on earnings quality
emerge.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
Maintain FULLY VALUED with higher TP of RM2.00. Maintain FULLY VALUED with higher TP of RM2.00. Maintain FULLY VALUED with higher TP of RM2.00. Maintain FULLY VALUED with higher TP of RM2.00. Post
earnings adjustment, our TP was nudged up to RM2.00 (from
RM1.90). Our TP implies 0.4x FY17F BV and assumes 10%
cost of equity, 3% long-term growth and 6% ROE. In our
view, there are no re-rating catalysts in sight and the stock
would likely continue to trade below book value given its
weaker fundamentals and lower ROE vs peers.
ASIAN INSIGHTS VICKERS SECURITIES
Page 19
Company Guide
Affin Holdings Berhad
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 248 247 247 (0.5) (0.3)
Islamic Income 63.0 65.3 69.1 9.6 9.6
Non-Interest Income 149 164 189 26.8 15.0
Operating IncomeOperating IncomeOperating IncomeOperating Income 460460460460 477477477477 504504504504 9.79.79.79.7 5.85.85.85.8
Operating Expenses (275) (287) (288) 5.0 0.3
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 185185185185 189189189189 216216216216 16.716.716.716.7 14.114.114.114.1
Provisions (29.7) (2.2) (22.2) (25.3) nm
Associates 3.96 12.8 5.81 46.5 (54.6)
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 149149149149 186186186186 186186186186 24.424.424.424.4 0.00.00.00.0
Taxation (45.3) (45.1) (41.5) (8.4) (8.0)
Minority Interests (1.8) (3.3) (4.7) (168.0) 42.3
Net ProfitNet ProfitNet ProfitNet Profit 102102102102 137137137137 140140140140 36.436.436.436.4 1.61.61.61.6
Growth (%)
Net Interest Income Gth 11.6 7.7 (0.3)
Net Profit Gth (26.5) 18.9 1.6
Key ratio (%)
NIM 2.1 2.0 2.0
NPL ratio 2.2 2.0 2.1
Loan-to deposit 91.4 93.1 87.6
Cost-to-income 59.7 60.3 57.2
Total CAR 13.5 14.9 15.6
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES
Page 20
Company Guide
Affin Holdings Berhad
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Persistent NIM squeeze.Persistent NIM squeeze.Persistent NIM squeeze.Persistent NIM squeeze. NIM is expected to remain under
pressure due to deposit competition as banks prepare to meet
the Liquidity Coverage Ratio requirement under Basel III. CASA,
the banks’ low-cost funding source, should help in managing
cost of funds. However, Affin’s CASA ratio stands at c.20%,
which is the lowest compared to Malaysian banking peers. This
could exert further pressure on cost of funds.
Corporate loan driven.Corporate loan driven.Corporate loan driven.Corporate loan driven. Affin’s loan portfolio is skewed towards
corporate loans, with this segment making up slightly more
than 50% of total loans. We have penned in 2%/5%/5% loan
growth across FY16-18F. There should be opportunities to
leverage on working capital financing of ETP projects as they are
rolled out. Affin should be able clinch a decent portion of these
given its relationship with Lembaga Tabung Angkatan Tentera
(LTAT) and Boustead, which are Affin’s major shareholders. We
expect deposit growth to track loan growth.
NonNonNonNon----interest income boost from acquisition is a challenge.interest income boost from acquisition is a challenge.interest income boost from acquisition is a challenge.interest income boost from acquisition is a challenge. Upon
acquisition of HwangDBS (completed in 2014), Affin has
boosted its non-interest income, especially for its stockbroking
and asset-management segments. Post-acquisition, Affin’s non-
interest income-to-total income ratio increased from 25% in
FY13 to 34% in FY15. However, growing non-interest income
will be a challenge going forward, given that the capital market
outlook remains weak.
CostCostCostCost----totototo----income ratio expected to stay highincome ratio expected to stay highincome ratio expected to stay highincome ratio expected to stay high. As a result of the
acquisition of HwangDBS, integration costs weighed on
expenses and drove up cost-to-income ratio. With integration
costs now a thing in the past, we expect expense growth to
gradually moderate. However, revenue drivers are expected to
remain sluggish, we assumed that cost-to-income ratio hover at
c.60%.
Expect credit cost to trend upwardsExpect credit cost to trend upwardsExpect credit cost to trend upwardsExpect credit cost to trend upwards.... A sharp spike in provision
was reported in 1QFY15 which triggered a surge in credit cost,
thus causing FY15 provisions to hit 38bps. Write backs were
reported in FY16, but we believe provisions would start to
normalise going forward
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, AllianceDBS
1.8%
1.8%
1.9%
1.9%
2.0%
2.0%
2.1%
2.1%
2.2%
0
100
200
300
400
500
600
700
800
900
1,000
2014A 2015A 2016F 2017F 2018F
RM m
Net Interest Income Net Interest Income Margin
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2014A 2015A 2016F 2017F 2018F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
10,000
20,000
30,000
40,000
50,000
2014A 2015A 2016F 2017F 2018F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
72%
77%
82%
87%
92%
36,443
41,443
46,443
51,443
56,443
61,443
66,443
2014A 2015A 2016F 2017F 2018F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
56.0%
57.0%
58.0%
59.0%
60.0%
61.0%
62.0%
63.0%
0
500
1,000
1,500
2,000
2,500
3,000
2014A 2015A 2016F 2017F 2018F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
Page 21
Company Guide
Affin Holdings Berhad
Balance Sheet:
Asset quality at risk. Asset quality at risk. Asset quality at risk. Asset quality at risk. Absolute NPLs were on the rise in most
quarters in FY15 before declining in 4Q15. Absolute NPL stayed
elevated in 3Q16, keeping gross NPL ratio at 2.1%. Loan loss
coverage ratio (ex regulatory reserve) stood at c.60%.
Sufficient capital.Sufficient capital.Sufficient capital.Sufficient capital. Positively, Affin is well capitalised as it has one
of the highest capital ratios compared to Malaysian banking
peers. This is attributed to its RM1.2bn rights issue completed in
July 2014 which was undertaken in tandem with the acquisition
of HwangDBS. Affin is eligible to implement a dividend
reinvestment plan but has yet to utilise it. We have assumed a
40% dividend payout from FY16-18F.
Share Price Drivers:
No catalyst in sight. No catalyst in sight. No catalyst in sight. No catalyst in sight. At 0.5x BV, Affin is the cheapest bank in
the industry. Nevertheless, we believe there is downside to
share price given its low ROE and persistent challenges to
earnings growth. We see no re-rating catalysts for Affin.
Potential re-rating catalysts could arise should the partnerships
to improve its investment banking business materialise to
enhance revenues.
Key Risks:
Limited earnings upside. Limited earnings upside. Limited earnings upside. Limited earnings upside. Earnings were historically driven by
loan recoveries, which we believe could begin to taper off. NIM
will remain under pressure due to competition. Further asset-
quality deterioration could result in higher credit costs.
Company Background
Affin Bank’s (Affin) loan portfolio leans towards corporate and
business financing. Affin’s major shareholders Lembaga
Tabung Angkatan Tentera (LTAT) and Boustead have fostered
strong business alliances with the bank. Bank of East Asia
(BEA) has a 23.5% stake in Affin.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, AllianceDBS
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2014A 2015A 2016F 2017F 2018F
NPL Ratio Provision Charge-Off Rate
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
2014A 2015A 2016F 2017F 2018F
Tier-1 CAR Total CAR
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2014A 2015A 2016F 2017F 2018F
Avg: 11.2x
+1sd: 13.8x
+2sd: 16.4x
-1sd: 8.6x
-2sd: 6x5.3
7.3
9.3
11.3
13.3
15.3
17.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 0.72x
+1sd: 0.88x
+2sd: 1.05x
-1sd: 0.56x
-2sd: 0.39x
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 22
Company Guide
Affin Holdings Berhad
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Loans Growth 9.6 6.9 2.0 5.0 5.0
Customer Deposits Growth 6.9 (0.1) 2.0 5.0 5.0
Yld. On Earnings Assets 4.2 4.1 4.1 4.1 4.0
Avg Cost Of Funds 2.7 2.8 2.8 2.9 2.9
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Net Interest Income 969 948 932 934 970
Islamic Income 220 239 260 284 309
Non-Interest Income 630 616 653 692 733
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,8201,8201,8201,820 1,8021,8021,8021,802 1,8451,8451,8451,845 1,9091,9091,9091,909 2,0122,0122,0122,012
Operating Expenses (1,059) (1,127) (1,141) (1,175) (1,210)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 760760760760 676676676676 704704704704 734734734734 802802802802
Provisions 16.0 (165) (46.9) (59.5) (74.6)
Associates 30.4 8.06 20.3 20.9 22.5
Exceptionals 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 807807807807 519519519519 677677677677 695695695695 750750750750
Taxation (208) (137) (169) (174) (187)
Minority Interests (5.8) (12.9) (13.6) (13.9) (15.0)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 593593593593 369369369369 495495495495 508508508508 547547547547
Net Profit bef Except 593 369 495 508 547
Growth (%)
Net Interest Income Gth 5.7 (2.2) (1.7) 0.2 3.8
Net Profit Gth (8.8) (37.7) 33.9 2.7 7.8
Margins, Costs & Efficiency (%)
Spread 1.5 1.3 1.3 1.2 1.2
Net Interest Margin 2.0 1.9 1.9 1.9 1.9
Cost-to-Income Ratio 58.2 62.5 61.8 61.6 60.2
Business Mix (%)
Net Int. Inc / Opg Inc. 53.3 52.6 50.5 48.9 48.2
Non-Int. Inc / Opg inc. 34.6 34.2 35.4 36.2 36.4
Fee Inc / Opg Income 34.6 34.2 35.4 36.2 36.4
Oth Non-Int Inc/Opg Inc 0.0 0.0 0.0 0.0 0.0
Profitability (%)
ROAE Pre Ex. 8.3 4.6 5.9 5.8 6.0
ROAE 8.3 4.6 5.9 5.8 6.0
ROA Pre Ex. 0.9 0.6 0.8 0.7 0.8
ROA 0.9 0.6 0.8 0.7 0.8
Source: Company, AllianceDBS
Expect provisions to increase
ASIAN INSIGHTS VICKERS SECURITIES
Page 23
Company Guide
Affin Holdings Berhad
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016
Net Interest Income 248 241 230 247 247
Islamic Income 63.0 64.8 58.9 65.3 69.1
Non-Interest Income 149 159 138 164 189
Operating IncomeOperating IncomeOperating IncomeOperating Income 460460460460 465465465465 427427427427 477477477477 504504504504
Operating Expenses (275) (280) (273) (287) (288)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 185185185185 184184184184 154154154154 189189189189 216216216216
Provisions (29.7) (20.6) 1.58 (2.2) (22.2)
Associates 3.96 (10.4) 11.4 12.8 5.81
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 149149149149 143143143143 153153153153 186186186186 186186186186
Taxation (45.3) (42.5) (35.1) (45.1) (41.5)
Minority Interests (1.8) (3.3) (2.2) (3.3) (4.7)
Net ProfitNet ProfitNet ProfitNet Profit 102102102102 97.497.497.497.4 116116116116 137137137137 140140140140
Growth (%)
Net Interest Income Gth 11.6 (2.6) (4.9) 7.7 (0.3)
Net Profit Gth (26.5) (4.9) 18.6 18.9 1.6
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Cash/Bank Balance 7,361 4,442 3,383 4,260 5,261
Government Securities 1,832 1,782 1,770 1,864 1,964
Inter Bank Assets 384 497 512 527 543
Total Net Loans & Advs. 40,492 43,345 44,235 46,467 48,797
Investment 13,453 13,667 14,077 14,499 14,934
Associates 0.0 0.0 0.0 0.0 0.0
Fixed Assets 164 435 448 461 475
Goodwill 1,615 1,612 1,612 1,612 1,612
Other Assets 1,378 1,621 1,670 1,720 1,772
Total AssetsTotal AssetsTotal AssetsTotal Assets 66,67866,67866,67866,678 67,40267,40267,40267,402 67,70767,70767,70767,707 71,41271,41271,41271,412 75,35975,35975,35975,359
Customer Deposits 50,604 50,549 51,560 54,138 56,845
Inter Bank Deposits 5,368 3,385 3,724 4,096 4,506
Debts/Borrowings 0.0 0.0 0.0 0.0 0.0
Others 1,761 3,835 2,323 2,583 2,874
Minorities 40.8 44.7 58.2 72.1 87.1
Shareholders' Funds 7,932 8,282 8,579 8,884 9,212
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 66,67866,67866,67866,678 67,40267,40267,40267,402 67,70767,70767,70767,707 71,41271,41271,41271,412 75,35975,35975,35975,359
Source: Company, AllianceDBS
3Q16 earnings beat expectations as provisions remained low
ASIAN INSIGHTS VICKERS SECURITIES
Page 24
Company Guide
Affin Holdings Berhad
Financial Stability Measures (%)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 80.0 85.7 85.8 85.8 85.8
Net Loans / Total Assets 60.7 64.3 65.3 65.1 64.8
Investment / Total Assets 20.2 20.3 20.8 20.3 19.8
Cust . Dep./Int. Bear. Liab. 88.9 91.5 90.9 90.4 90.0
Interbank Dep / Int. Bear. 9.4 6.1 6.6 6.8 7.1
Asset Quality
NPL / Total Gross Loans 1.8 1.9 1.9 1.8 1.8
NPL / Total Assets 1.1 1.2 1.3 1.2 1.2
Loan Loss Reserve Coverage 75.6 64.0 61.4 62.4 61.7
Provision Charge-Off Rate 0.0 0.4 0.1 0.1 0.2
Capital Strength
Total CAR 14.9 15.6 15.5 15.1 14.7
Tier-1 CAR 13.7 13.5 13.4 13.1 12.8
Source: Company, AllianceDBS
Target Price & Ratings History
Source: AllianceDBS
Analyst: Lynette CHENG
Sue Lin LIM
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 2.32 2.00 FULLY VALUED
2: 22 Jan 16 2.17 2.00 FULLY VALUED
3: 02 Feb 16 2.16 2.00 FULLY VALUED
4: 25 Feb 16 2.16 2.00 FULLY VALUED
5: 29 Feb 16 2.15 1.80 FULLY VALUED
6: 24 Mar 16 2.32 1.80 FULLY VALUED
7: 03 May 16 2.30 1.80 FULLY VALUED
8: 25 May 16 2.27 1.80 FULLY VALUED
9: 02 Jun 16 2.22 1.80 FULLY VALUED
10: 12 Jul 16 2.12 1.80 FULLY VALUED
11: 14 Jul 16 2.12 1.80 FULLY VALUED
12: 01 Aug 16 2.13 1.80 FULLY VALUED
13: 22 Aug 16 2.15 1.90 FULLY VALUED
14: 31 Oct 16 2.20 1.90 FULLY VALUED
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 01 Dec 16 2.29 2.00 FULLY VALUED
1
2
3
4
5
6
7
8
910
11
12
13
1415
1.98
2.03
2.08
2.13
2.18
2.23
2.28
2.33
2.38
2.43
2.48
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
Low loan loss coverage ratio
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM4.23 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM4.50 (6% upside) (Prev RM4.50) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Improved earnings quality
Where we differ:Where we differ:Where we differ:Where we differ: Earnings higher than consensus possibly on lower
credit cost assumptions
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 2Q/1HFY17 earnings within our/consensus
expectations; declined on slower recoveries • Absolute impaired loans declined q-o-q; CET1 ratio
lifted by 60bps q-o-q • On track with NIM management and cost savings
targets • Trim earnings on lower loan and deposit growth
assumption; Maintain HOLD, lower RM4.50 TP
Price Relative
Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Pre-prov. Profit 1,519 1,756 1,987 2,227 Net Profit 1,302 1,252 1,338 1,502 Net Pft (Pre Ex.) 1,302 1,252 1,338 1,502 Net Pft Gth (Pre-ex) (%) (32.1) (3.9) 6.9 12.3 EPS (sen) 43.2 41.5 44.4 49.8 EPS Pre Ex. (sen) 43.2 41.5 44.4 49.8 EPS Gth Pre Ex (%) (32) (4) 7 12 Diluted EPS (sen) 43.2 41.5 44.4 49.8 PE Pre Ex. (X) 9.8 10.2 9.5 8.5 Net DPS (sen) 15.5 16.6 17.8 19.9 Div Yield (%) 3.7 3.9 4.2 4.7 ROAE Pre Ex. (%) 8.8 8.1 8.3 8.8 ROAE (%) 8.8 8.1 8.3 8.8 ROA (%) 1.0 1.0 1.1 1.1 BV Per Share (sen) 503 524 550 580 P/Book Value (x) 0.8 0.8 0.8 0.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 42.6 43.2 45.5
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 5 H: 13
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Tracking expectations well Keeping watch on deliveriesKeeping watch on deliveriesKeeping watch on deliveriesKeeping watch on deliveries.... For FY17, AMMB aspires to achieve ROE of 8.5-9%, annual net profit growth of 5% and cost-to-income ratio of ≤57%. These are premised on: (1) focused growth segment (mass affluent, affluent, SMEs, mid-sized corporations), (2) products focus (cards, transaction banking, markets, wealth management), and (3) sustaining its position with its current engines (corporate loans, debt capital markets, asset management). In 2QFY17, we have seen AMMB staying on track with its NIM and cost-savings targets. Re-rating catalysts would emerge when strategic initiatives start to deliver results in the coming 12 months and/or possible changes at the shareholders’ level. 2222QFY17 earnings QFY17 earnings QFY17 earnings QFY17 earnings metmetmetmet expectations; bottomline strained by expectations; bottomline strained by expectations; bottomline strained by expectations; bottomline strained by lowerlowerlowerlower recoveries.recoveries.recoveries.recoveries. Earnings were softer y-o-y, due to benign growth in income and lower recoveries. On a q-o-q basis, earnings were higher thanks to a lower effective tax rate. NIM was largely stable q-o-q, as lower cost of funds mitigated the impact of lower wholesale and retail loan yields. Loans hardly grew on continued derisking. Auto loans remain on a decline. There were positive growth tractions for mortgages and SMEs, in line with its targeted segments. Deposits contracted as the bank continues to actively manage higher cost deposits. Given the weak traction, we lower our FY16 loan and deposit growth assumption to 2% and -2%, respectively. This resulted in minimal revision to earnings (<3%) and TP (RM4.60 to RM4.50). Keep watch on real estate and oil and gas exposure.Keep watch on real estate and oil and gas exposure.Keep watch on real estate and oil and gas exposure.Keep watch on real estate and oil and gas exposure. While asset quality showed improvement in 2QFY17 (as evidenced by declines in absolute impaired loans ratio and impaired loans ratio), we remain cautious on the bank’s exposures to the oil and gas sector and real estate which currently make up 4% and 13% of gross loans, respectively. While more recoveries can be anticipated, AMMB expects the long-run average credit cost (ex-recoveries) to come in around 50bps. Valuation: AMMB is a HOLD with RM4.50 TP. Our TP is derived using the Gordon Growth Model (assuming 9% ROE, 10% cost of equity, and 3% long-term growth). AMMB’s valuations may hinge on corporate events that are expected to unfold. Key Risks to Our View: Inability to deliver on strategic goals.Inability to deliver on strategic goals.Inability to deliver on strategic goals.Inability to deliver on strategic goals. While it is still early days, we believe there will be risks to the share price performance if AMMB fails to deliver quick wins from its strategic initiatives. At A Glance Issued Capital (m shrs) 3,014
Mkt. Cap (RMm/US$m) 12,750 / 2,866
Major Shareholders (%)
ANZ (%) 23.8
EPF (%) 15.0
AmCorp Group (%) 13.0
Free Float (%) 46.7
3m Avg. Daily Val (US$m) 2.0
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
AMMB Holdings Version 8 | Bloomberg: AMM MK | Reuters: AMMB.KL Refer to important disclosures at the end of this report
53
73
93
113
133
153
173
193
213
3.5
4.5
5.5
6.5
7.5
8.5
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
AMMB Holdings (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 26
Company Guide
AMMB Holdings
WHAT’S NEW
Meeting expectations
HighlightsHighlightsHighlightsHighlights
Strained by lower recoveriesStrained by lower recoveriesStrained by lower recoveriesStrained by lower recoveries. AMMB’s 2Q/6MFY17 earnings
came in within expectations. Earnings were softer y-o-y, on the
back of benign growth in income and lower recoveries. Non-
interest income was stronger (driven by higher gains from fixed
income trading), but was offset by lower net interest income
(as NIM fell considerably in 2HFY16). Expenses increased on
higher personnel cost and investments on the back of its
implementation of strategic initiatives.
QQQQ----oooo----q earnings lifted by lower tax.q earnings lifted by lower tax.q earnings lifted by lower tax.q earnings lifted by lower tax. Sequentially, earnings rose
q-o-q thanks to a lower effective tax rate (21% in 2QFY17;
from higher non-deductible expenses). Pre-tax profit was
slightly lower as the effect of lower expenses was more than
offset by the slower recoveries. NIM was largely stable q-o-q,
as lower cost of funds mitigated the impact of lower wholesale
and retail loan yields.
Loan growth momentum still slow;Loan growth momentum still slow;Loan growth momentum still slow;Loan growth momentum still slow;. . . . Loan growth remained
weak at +1% y-o-y/-1% YTD/+0.3% q-o-q, led by mortgages
and SME loans but eclipsed by higher corporate repayments.
Deposits contracted (-7% y-o-y/-8% YTD/-4% q-o-q), reflective
of AMMB’s intention to rein in higher cost deposits. Asset
quality improvement was evidenced by declines in absolute
impaired loans ratio (by 3% q-o-q) and impaired loans ratio (by
5bps q-o-q to 1.64%). Oil and gas exposure, real estate
exposure loans, comprised 4% and 13% of total loans,
respectively. Restructured and rescheduled loans were at 0.6%
of its total loan book. Loan loss coverage ratio stood at 84%.
CET1 ratio lifted by 60bps.CET1 ratio lifted by 60bps.CET1 ratio lifted by 60bps.CET1 ratio lifted by 60bps. Fully-loaded CET1 ratio improved
by 60bps to 11.2% as a result of higher retained earnings. This
q-o-q improvement was in spite of the higher risk weighted
assets noted. Separately, AMMB declared an interim DPS of 5
sen (23% payout).
OutlookOutlookOutlookOutlook
AMMB is AMMB is AMMB is AMMB is targeting to achieve 8.5% to 9% ROE in FY1targeting to achieve 8.5% to 9% ROE in FY1targeting to achieve 8.5% to 9% ROE in FY1targeting to achieve 8.5% to 9% ROE in FY17777,
driven by lower expenses (targeting ≤57%) and sustained
recoveries (retail recoveries expected to continue in the
medium term). Full-year loan growth is expected to tread in
positive territory. Volatility in the market and the levels of
recoveries are the key factors that may derail targets. Given the
weak traction YTD, we lower our loan and deposit growth
assumptions for FY16 to 2% and -2% respectively (from 3%
and 5%). This resulted in a slight trim in earnings, by 1-3%
across FY17-19F.
On track to meet targeted On track to meet targeted On track to meet targeted On track to meet targeted cost scost scost scost savings.avings.avings.avings. AMMB targets to
achieve RM128m savings for the full year from its strategic
initiatives. With YTD savings of RM62m, AMMB is on track to
meet its target. Apart from its targeted savings, we continue to
keep an eye on AMMB’s deliveries in 2HFY17, in its targeted
areas (products – cards & merchants, transaction banking,
markets & forex, wealth management; segments – mass
affluent, affluent, SME, mid corporates) as well as its capital
optimisation plans.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
MaintainMaintainMaintainMaintain HOLDHOLDHOLDHOLD, lower RM4.50 TP, lower RM4.50 TP, lower RM4.50 TP, lower RM4.50 TP. Subsequent to our trim in
earnings, our target price is nudged down to RM4.50 (from
RM4.60). Our TP is derived using the Gordon Growth Model
(assuming 9% ROE, 10% cost of equity, and 3% long-term
growth) and implies 0.8x CY17 BV. We do not discount
catalysts arising from its medium-term aspirations and advise
investors to keep an eye on this space.
ASIAN INSIGHTS VICKERS SECURITIES
Page 27
Company Guide
AMMB Holdings
Quarterly / Interim Income Statement (RMm)
FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 432 392 373 (13.5) (4.9)
Islamic Income 200 197 201 0.6 0.6
Non-Interest Income 299 357 368 23.2 3.2
Operating IncomeOperating IncomeOperating IncomeOperating Income 931931931931 947947947947 943943943943 1.31.31.31.3 (0.4)(0.4)(0.4)(0.4)
Operating Expenses (500) (536) (525) 5.0 (2.1)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 432432432432 411411411411 419419419419 (3.0)(3.0)(3.0)(3.0) 1.91.91.91.9
Provisions 65.6 63.7 42.4 (35.3) (33.4)
Associates 3.86 4.63 11.1 186.5 138.7
Exceptionals 0 0 0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 501501501501 479479479479 472472472472 (5.8)(5.8)(5.8)(5.8) (1.5)(1.5)(1.5)(1.5)
Taxation (93.1) (120) (97.0) 4.2 (19.2)
Minority Interests (25.4) (36.5) (22.6) 11.1 (38.1)
Net ProfitNet ProfitNet ProfitNet Profit 383383383383 323323323323 353353353353 (7.8)(7.8)(7.8)(7.8) 9.29.29.29.2
Growth (%)
Net Interest Income Gth 1.9 1.2 (4.9)
Net Profit Gth 12.7 15.3 9.2
Key ratio (%)
NIM 2.1 2.0 2.0
NPL ratio 2.0 1.7 1.6
Loan-to deposit 95.5 99.0 103.4
Cost-to-income 53.7 56.6 55.6
Total CAR 15.6 16.1 16.5
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
Page 28
Company Guide
AMMB Holdings
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM to stabilise.NIM to stabilise.NIM to stabilise.NIM to stabilise. While cost of fund is expected to remain under
pressure due to deposit competition, AMMB aspires to keep
NIM stable as the group pursues high-yielding SME loans going
forward. Current account and savings account (CASA), as
banks’ low-cost funding sources, should help the bank in
managing cost of funds. Hence, AMMB is focused on shoring
up its CASA with a target of 32% by year 2020. Currently,
AMMB has one of the lowest CASA ratios among its peers, at
c.22%.
Subdued loan growth.Subdued loan growth.Subdued loan growth.Subdued loan growth. Over the past few years, AMMB has
been rebalancing its portfolio with a notable reduction in its
auto loan exposure to the vulnerable income group (defined as
households with incomes of ≤ RM3,000). Under AMMB’s Top 4
aspirations, identified areas with potential for growth include
the mass affluent, affluent, SME and mid-sized corporation
space. We have imputed 2% loan growth in our forecasts.
NearNearNearNear----term drag on underwriting profit due to determ drag on underwriting profit due to determ drag on underwriting profit due to determ drag on underwriting profit due to de----tariffication.tariffication.tariffication.tariffication.
AmGeneral Insurance (AmG) is one of the top motor insurers in
Malaysia. Due to its large exposure to motor insurance, we
expect de-tariffication (expected to be implemented in 2017) to
crimp AMMB’s earnings as insurers compete for market share.
However, in our view, pricing should normalise over time. We
also note that a strong distribution channel, alongside low
claims and combined ratio, could assist in sustaining market
share and profitability.
Banking on previous acquisitions to boost nonBanking on previous acquisitions to boost nonBanking on previous acquisitions to boost nonBanking on previous acquisitions to boost non----interest income.interest income.interest income.interest income.
AMMB’s acquisitions and tie-ups were completed in FY15 and
delivering on these is a key point for the group going forward.
Among the acquisitions AMMB embarked on were MBF Cards
and Kurnia Insurans as well as the tie-up with Metlife for its life
insurance business. AMMB is looking to scale up its cards,
transaction banking, markets and wealth management
businesses, with aspirations to be the Top 4 in these segments
by year 2020.
Cost pressures.Cost pressures.Cost pressures.Cost pressures. AMMB’s cost-to-income ratio is at 56%, which
is on the higher side of the industry average. Management
targets to lower it to at 50-55% in FY17-18, supplemented by
an emphasis on cost discipline. Although the long-term goal is
to bring this down to 40%, the ratio will remain high in the
next few years, as IT and investment-related expenses are
expected to be incurred to roll out initiatives for AMMB’s new
strategic plan.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.9%
2.0%
2.1%
2.2%
2.3%
2.4%
2.5%
2.6%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2015A 2016A 2017F 2018F 2019F
RM m
Net Interest Income Net Interest Income Margin
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2015A 2016A 2017F 2018F 2019F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2015A 2016A 2017F 2018F 2019F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
84%
89%
94%
99%
104%
109%
77,556
82,556
87,556
92,556
97,556
102,556
107,556
2015A 2016A 2017F 2018F 2019F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2015A 2016A 2017F 2018F 2019F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
Page 29
Company Guide
AMMB Holdings
Balance Sheet:
Gross NPL ratio targeted at below 2%. Gross NPL ratio targeted at below 2%. Gross NPL ratio targeted at below 2%. Gross NPL ratio targeted at below 2%. Its asset quality has
deteriorated, as absolute NPLs increased y-o-y and gross NPL
ratio increased to just slightly below 2% in FY16. Consequently,
AMMB’s loan loss coverage ratio slid to a 3-year low of 81%.
While retail gross NPL ratio continues to show resilient trends,
we remain cautious on its asset quality in a soft operating
environment.
Capital ratios below peers.Capital ratios below peers.Capital ratios below peers.Capital ratios below peers. AMMB’s consolidated fully loaded
CET1 ratio currently sits at c.11%. AMMB is building up
advanced internal rating-based (AIRB) capabilities to further
enhance its capital ratios, and this is targeted to complete by
2017. Other capital enhancing options include rationalising
non-core operations (AMMB has closed approximately 20 of
such small entities within the group) and streamlining internal
organisation structure to improve efficiency. AMMB aspires to
keep its dividend payout at 40%.
Share Price Drivers:
Limited catalysts.Limited catalysts.Limited catalysts.Limited catalysts. AMMB is currently trading at 0.8x CY17F BV.
Although valuations are undemanding, a re-rating appears
unlikely in the near term, no thanks to its subdued earnings
outlook. Its share price would likely move in response to
newsflow.
Key Risks:
Inability to grow balance sheet efficientlyInability to grow balance sheet efficientlyInability to grow balance sheet efficientlyInability to grow balance sheet efficiently. AMMB has been
rebalancing its portfolio over the past few years. Inability to
translate growth into earnings would limit earnings
momentum. The liberalisation of (general) insurance tariffs,
possibly in 2017, could crimp underwriting margins for its
general insurance business.
Company Background
AMMB Holdings Berhad is an investment holding company.
The company, through its subsidiaries, provides commercial
banking, retail financing, stock and futures broking, and
investment advisory. AMMB also underwrites general
insurance, provides asset and unit trust management, and
nominee services.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2015A 2016A 2017F 2018F 2019F
NPL Ratio Provision Charge-Off Rate
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
2015A 2016A 2017F 2018F 2019F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2015A 2016A 2017F 2018F 2019F
Avg: 11.8x
+1sd: 13.2x
+2sd: 14.5x
-1sd: 10.5x
-2sd: 9.1x
8.1
9.1
10.1
11.1
12.1
13.1
14.1
15.1
16.1
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 1.35x
+1sd: 1.71x
+2sd: 2.07x
-1sd: 0.99x
-2sd: 0.62x0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 30
Company Guide
AMMB Holdings
Key Assumptions
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Gross Loans Growth (1.6) 0.1 2.0 5.0 5.0
Customer Deposits Growth 2.7 (1.9) (2.0) 5.0 5.0
Yld. On Earnings Assets 3.6 3.4 3.4 3.3 3.3
Avg Cost Of Funds 2.1 2.2 2.2 2.2 2.3
Income Statement (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Net Interest Income 1,981 1,638 1,561 1,514 1,493
Islamic Income 865 806 927 1,066 1,226
Non-Interest Income 1,876 1,250 1,486 1,669 1,815
Operating IncomeOperating IncomeOperating IncomeOperating Income 4,7214,7214,7214,721 3,6933,6933,6933,693 3,9743,9743,9743,974 4,2494,2494,2494,249 4,5344,5344,5344,534
Operating Expenses (2,158) (2,174) (2,218) (2,262) (2,307)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,5642,5642,5642,564 1,5191,5191,5191,519 1,7561,7561,7561,756 1,9871,9871,9871,987 2,2272,2272,2272,227
Provisions 72.9 211 (29.2) (141) (155)
Associates 3.19 2.50 2.50 2.50 2.50
Exceptionals (214) 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 2,3902,3902,3902,390 1,7311,7311,7311,731 1,7291,7291,7291,729 1,8481,8481,8481,848 2,0752,0752,0752,075
Taxation (560) (332) (380) (407) (456)
Minority Interests (126) (97.3) (97.2) (104) (117)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 1,7041,7041,7041,704 1,3021,3021,3021,302 1,2521,2521,2521,252 1,3381,3381,3381,338 1,5021,5021,5021,502
Net Profit bef Except 1,919 1,302 1,252 1,338 1,502
Growth (%)
Net Interest Income Gth (12.8) (17.3) (4.7) (3.0) (1.3)
Net Profit Gth (4.4) (23.6) (3.9) 6.9 12.3
Margins, Costs & Efficiency (%)
Spread 1.5 1.2 1.1 1.1 1.0
Net Interest Margin 2.4 2.0 2.1 2.1 2.1
Cost-to-Income Ratio 45.7 58.9 55.8 53.2 50.9
Business Mix (%)
Net Int. Inc / Opg Inc. 42.0 44.3 39.3 35.6 32.9
Non-Int. Inc / Opg inc. 39.7 33.8 37.4 39.3 40.0
Fee Inc / Opg Income 13.9 14.2 16.5 17.7 18.3
Oth Non-Int Inc/Opg Inc 25.8 19.7 20.9 21.6 21.8
Profitability (%)
ROAE Pre Ex. 13.9 8.8 8.1 8.3 8.8
ROAE 12.4 8.8 8.1 8.3 8.8
ROA Pre Ex. 1.5 1.0 1.0 1.1 1.1
ROA 1.4 1.0 1.0 1.1 1.1
Source: Company, DBS Bank
Loans contraction in FY15 and FY16 reflects AMMB’s portfolio rebalancing initiatives
ASIAN INSIGHTS VICKERS SECURITIES
Page 31
Company Guide
AMMB Holdings
Quarterly / Interim Income Statement (RMm)
FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017
Net Interest Income 432 395 388 392 373
Islamic Income 200 208 190 197 201
Non-Interest Income 299 295 323 357 368
Operating IncomeOperating IncomeOperating IncomeOperating Income 931931931931 898898898898 901901901901 947947947947 943943943943
Operating Expenses (500) (567) (621) (536) (525)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 432432432432 331331331331 280280280280 411411411411 419419419419
Provisions 65.6 80.1 58.0 63.7 42.4
Associates 3.86 (5.4) 3.82 4.63 11.1
Exceptionals 0 0 0 0 0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 501501501501 406406406406 342342342342 479479479479 472472472472
Taxation (93.1) (94.1) (30.6) (120) (97.0)
Minority Interests (25.4) (11.5) (31.2) (36.5) (22.6)
Net ProfitNet ProfitNet ProfitNet Profit 383383383383 300300300300 280280280280 323323323323 353353353353
Growth (%)
Net Interest Income Gth 1.9 (8.6) (1.8) 1.2 (4.9)
Net Profit Gth 12.7 (21.5) (6.7) 15.3 9.2
Balance Sheet (RMm)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Cash/Bank Balance 10,759 11,988 7,303 6,429 5,478
Government Securities 0.0 0.0 0.0 0.0 0.0
Inter Bank Assets 4,069 1,334 1,400 1,470 1,544
Total Net Loans & Advs. 86,174 86,513 88,154 92,568 97,214
Investment 18,926 20,769 22,599 24,601 26,790
Associates 662 674 674 674 674
Fixed Assets 479 293 302 311 320
Goodwill 3,348 3,370 3,370 3,370 3,370
Other Assets 8,954 8,309 9,031 9,483 9,957
Total AssetsTotal AssetsTotal AssetsTotal Assets 133,804133,804133,804133,804 133,764133,764133,764133,764 133,373133,373133,373133,373 139,472139,472139,472139,472 145,941145,941145,941145,941
Customer Deposits 92,130 90,377 88,569 92,998 97,648
Inter Bank Deposits 2,302 1,744 1,831 1,923 2,019
Debts/Borrowings 8,302 8,608 8,608 8,608 8,608
Others 13,018 14,155 14,540 15,062 15,610
Minorities 1,052 951 1,048 1,152 1,269
Shareholders' Funds 14,455 15,168 15,781 16,583 17,484
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 133,804133,804133,804133,804 133,764133,764133,764133,764 133,373133,373133,373133,373 139,472139,472139,472139,472 145,941145,941145,941145,941
Source: Company, DBS Bank
Pre-tax profit lower q-o-q due to slower recoveries
ASIAN INSIGHTS VICKERS SECURITIES
Page 32
Company Guide
AMMB Holdings
Financial Stability Measures (%)
FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 93.5 95.7 99.5 99.5 99.6
Net Loans / Total Assets 64.4 64.7 66.1 66.4 66.6
Investment / Total Assets 14.1 15.5 16.9 17.6 18.4
Cust . Dep./Int. Bear. Liab. 89.7 89.7 89.5 89.8 90.2
Interbank Dep / Int. Bear. 2.2 1.7 1.8 1.9 1.9
Asset Quality
NPL / Total Gross Loans 1.8 1.9 1.9 1.8 1.8
NPL / Total Assets 1.2 1.3 1.3 1.2 1.2
Loan Loss Reserve Coverage 104.9 81.1 87.9 92.4 91.4
Provision Charge-Off Rate (0.1) (0.2) 0.0 0.1 0.2
Capital Strength
Total CAR 16.2 16.5 17.6 17.7 17.8
Tier-1 CAR 12.2 12.5 13.6 13.8 14.0
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 4.48 4.80 HOLD
2: 22 Jan 16 4.32 4.80 HOLD
3: 02 Feb 16 4.36 4.80 HOLD
4: 25 Feb 16 4.34 4.80 HOLD
5: 29 Feb 16 4.33 4.60 HOLD
6: 01 Mar 16 4.47 4.60 HOLD
7: 24 Mar 16 4.58 4.60 HOLD
8: 03 May 16 4.48 4.60 HOLD
9: 12 May 16 4.52 4.60 HOLD
10: 30 May 16 4.35 4.50 HOLD
11: 02 Jun 16 4.35 4.50 HOLD
12: 20 Jun 16 4.40 4.50 HOLD
13: 12 Jul 16 4.36 4.50 HOLD
14: 14 Jul 16 4.33 4.50 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 01 Aug 16 4.39 4.50 HOLD
16: 23 Aug 16 4.46 4.60 HOLD
17: 05 Sep 16 4.32 4.60 HOLD
18: 31 Oct 16 4.20 4.60 HOLD
19: 22 Nov 16 4.11 4.50 HOLD
1 2
3
4
5
67
8
9 10
11
12
13
14
15
16
1718
19
3.70
3.90
4.10
4.30
4.50
4.70
4.90
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
Fully loaded CET1 estimated at 11%
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM4.64 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM4.80 (3% upside) (Prev RM4.80) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Delivery of new strategic targets
Where we differ:Where we differ:Where we differ:Where we differ: Earnings below consensus as we imputed higher credit
costs
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 3Q16 earnings inline; lifted by lower provisions
and one-off gain from sale of stake in Sun Life insurance
• Judging from the current run rate, CIMB is likely to miss targets set early this year
• In negotiations for strategic partnership in stockbroking business; expect improvement in cost-to-income ratio if agreement is reached
• Maintain HOLD, RM4.80 TP
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Pre-prov. Profit 6,146 7,014 7,106 7,576 Net Profit 2,850 3,573 3,998 4,378 Net Pft (Pre Ex.) 2,848 3,573 3,998 4,378 Net Pft Gth (Pre-ex) (%) (5.3) 25.4 11.9 9.5 EPS (sen) 33.6 41.6 45.8 49.5 EPS Pre Ex. (sen) 33.6 41.6 45.8 49.5 EPS Gth Pre Ex (%) (10) 24 10 8 Diluted EPS (sen) 33.4 41.3 45.5 49.1 PE Pre Ex. (X) 13.8 11.2 10.1 9.4 Net DPS (sen) 14.0 18.0 20.0 22.0 Div Yield (%) 3.0 3.9 4.3 4.7 ROAE Pre Ex. (%) 7.3 8.4 8.6 8.7 ROAE (%) 7.3 8.4 8.6 8.7 ROA (%) 0.7 0.8 0.8 0.8 BV Per Share (sen) 481 513 549 587 P/Book Value (x) 1.0 0.9 0.8 0.8 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 42.4 48.8 54.4
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 10 S: 1 H: 14
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Falling short of targets
2016 2016 2016 2016 proved to be a challenging yearproved to be a challenging yearproved to be a challenging yearproved to be a challenging year, HOLD. , HOLD. , HOLD. , HOLD. On a normalised basis, YTD loan growth of 2.2% and annualised ROE of 8.5%, point to clear challenges in achieving its full-year targets. Across its regional operations, asset quality should still be keenly tracked. Asset quality indicators in its Malaysian operations have held up better than expected, but we expect provisions to remain elevated in Indonesia and to increase in Thailand. Positively, expense trends are well on track to meet a cost-to-income ratio of <53% while its capital ratio, CET1, is expected to hit 11%. 3Q163Q163Q163Q16 results lifted by lower provisionsresults lifted by lower provisionsresults lifted by lower provisionsresults lifted by lower provisions and oneand oneand oneand one----off gainoff gainoff gainoff gain.... Based on pre-provision operating profit, earnings were higher y-o-y on the back of higher non-interest income and Islamic banking income. A RM150m one-off gain arose from the sale of its stake in Sun Life insurance. Loan growth stood at +2% YTD, underpinned by its Malaysian book. Singapore and Indonesia loans registered negative growth, reflective of its portfolio rebalancing initiatives (in Indonesia) and the weaker macroeconomic backdrop (in Singapore). Asset quality remained resilient in Malaysia, but Indonesia continues to see strains in its SME and commercial segments. Oil and gas exposure was generally unchanged at 2.7% of loan book. Hopeful for a better 2017Hopeful for a better 2017Hopeful for a better 2017Hopeful for a better 2017. FY16 targets remain unchanged, but judging from the current momentum, we expect CIMB to miss its targets. Credit cost is expected to decline from the high base to 55bps in FY17F (FY16F 73bps), which should lift earnings and translate to ROE of 9%. NIM compression may feature in the event of more rate cuts by BNM as well as from its Indonesian portfolio rebalancing. Our forecast currently imputes 10bps y-o-y compression in FY17. 2017 may be more positive for Indonesia while it remains hopeful that Malaysian operations stay resilient. Valuation: CIMB is a HOLD with TP at RM4.80 that is based on the Gordon Growth Model and implies 0.9x FY17F BV. Our TP assumes 10% ROE, 5% long-term growth and 11% cost of equity. Key Risks to Our View: FasterFasterFasterFaster----thanthanthanthan----expected delivery of T18 strategies and core expected delivery of T18 strategies and core expected delivery of T18 strategies and core expected delivery of T18 strategies and core earnings recovery. earnings recovery. earnings recovery. earnings recovery. We have imputed a weak year for CIMB’s Indonesian operations in FY16, so a better-than-expected improvement would pose upside risk to our earnings forecasts. A quicker-than-expected delivery of its T18 strategies would prove our bearish view on CIMB wrong. At A Glance Issued Capital (m shrs) 8,868
Mkt. Cap (RMm/US$m) 41,149 / 9,250
Major Shareholders (%)
Khazanah 29.7
EPF 17.3
Free Float (%) 41.6
3m Avg. Daily Val (US$m) 14.3
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
CIMB Group Hldgs Version 7 | Bloomberg: CIMB MK | Reuters: CIMB.KL Refer to important disclosures at the end of this report
47
67
87
107
127
147
167
187
207
3.5
4.5
5.5
6.5
7.5
8.5
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
CIMB Group Hldgs (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 34
Company Guide
CIMB Group Hldgs
WHAT’S NEW
Earnings lifted by lower provisions and one-off gain
HighlightsHighlightsHighlightsHighlights
Provisions remain a sore pointProvisions remain a sore pointProvisions remain a sore pointProvisions remain a sore point. CIMB’s 3Q16 net profit met
our/consensus expectations. Earnings were lifted by lower
provisions and one-off RM150m gain in the sale of stake in
Sun Life insurance booked during the quarter. Based on pre-
provision operating profit, earnings were higher y-o-y on the
back of higher non-interest income (3Q15 was pulled down by
forex losses under its wholesale banking activities) and Islamic
banking income (mainly due to stronger revenues and lower
provisions). NIM was lower q-o-q, dragged mainly by its
Malaysian operations which experienced deposit competition
as well as a rate cut in 3Q16 (BNM lowered OPR by 25bps in
July). Cost-to-income inched up q-o-q in the absence of
expense write backs booked in 2Q16. On a business-as-usual
(BAU) basis, 9M16 cost growth was relatively flat, reflecting
the bank’s initiatives to contain expenses. Provisions remain
elevated, largely due to its Indonesian operations. Associates
contribution fell on the back of softer performance by its
associate, Bank of Yingkou.
Robust loan growth and asset quality in Malaysia, but dragged Robust loan growth and asset quality in Malaysia, but dragged Robust loan growth and asset quality in Malaysia, but dragged Robust loan growth and asset quality in Malaysia, but dragged
by CIMB Niaga.by CIMB Niaga.by CIMB Niaga.by CIMB Niaga. Loan growth stood at +2% q-o-q/+2% YTD,
underpinned by its Malaysian operations. Singapore and
Indonesia registered negative growth, reflective of its portfolio
rebalancing initiatives (in Indonesia) and the weaker
macroeconomic backdrop (in Singapore). Deposits recorded
growth of 7% q-o-q/ 6% YTD. The stronger deposit growth
lowered LDR to 88%. Gross impaired loans ratio was flat q-o-q
at 3.2%. Asset quality remained resilient in Malaysia, but
Indonesia continues to see strains in its SME and commercial
segments. Overall oil and gas exposure was generally
unchanged at 2.7% of loan book. Loan loss coverage dipped
q-o-q to 81% (93% including regulatory reserve) from 84% in
2Q16. Fully-loaded CET1/Tier-1/Total capital ratios stand at
10.9%/12.4%/15.8%.
OutlookOutlookOutlookOutlook
Unlikely to meet initial targets set for 2016Unlikely to meet initial targets set for 2016Unlikely to meet initial targets set for 2016Unlikely to meet initial targets set for 2016.... At the current run
rate, management expects ROE and loan growth to more likely
reach 9% and 6%, respectively, vs initial targets of 10% for
both metrics. CIMB remains on track to hit its 12% CET1 ratio
target by 2018. Management expects more uplift from the
optimisation of its risk-weighted assets and potentially some
non-core asset divestment. CIMB is also committed to achieve
its cost-to-income ratio target of 53% for 2016, as the bank
continues to roll out initiatives to lower expenses.
In negotiaIn negotiaIn negotiaIn negotiation for strategic partnership for itstion for strategic partnership for itstion for strategic partnership for itstion for strategic partnership for its stockbroking stockbroking stockbroking stockbroking
businessbusinessbusinessbusiness.... CIMB is still in the midst of exploring a 50:50 joint
venture with China Galaxy Securities in its stockbroking
business (which includes institutional and retail brokerage,
equities research as well as associated securities businesses). In
the event an agreement is reached, management expects cost-
to-income to improve by 100bps. The negotiations will take
place for three months from mid-October.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
Maintain HOLD, RM4.80 TP.Maintain HOLD, RM4.80 TP.Maintain HOLD, RM4.80 TP.Maintain HOLD, RM4.80 TP. As CIMB’s earnings were within
our expectations, we keep our earnings and TP unchanged.
Our TP assumes 10% ROE, 5% growth and 11% cost of
equity. We believe 2017 will remain a challenging year for
CIMB, making the stock difficult to re-rate beyond 1x BV for
now. Across its regional operations, asset quality should be
keenly tracked. Although indicators in Malaysia have held up
better than expected, we expect provisions to remain elevated
in Indonesia and to increase in Thailand for 2016.
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
CIMB Group Hldgs
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 2,416 2,352 2,445 1.2 4.0
Islamic Income 386 413 425 10.1 10.1
Non-Interest Income 1,038 1,138 1,103 6.3 (3.0)
Operating IncomeOperating IncomeOperating IncomeOperating Income 3,8403,8403,8403,840 3,9033,9033,9033,903 3,9743,9743,9743,974 3.53.53.53.5 1.81.81.81.8
Operating Expenses (2,261) (2,091) (2,193) (3.0) 4.9
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,5801,5801,5801,580 1,8121,8121,8121,812 1,7811,7811,7811,781 12.712.712.712.7 (1.7)(1.7)(1.7)(1.7)
Provisions (529) (657) (586) 10.7 (10.9)
Associates 23.7 33.5 15.6 (34.0) (53.3)
Exceptionals 0.0 0.0 150 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,0751,0751,0751,075 1,1891,1891,1891,189 1,3611,3611,3611,361 26.626.626.626.6 14.514.514.514.5
Taxation (256) (313) (312) 21.7 (0.3)
Minority Interests (14.3) (3.1) (25.7) (79.3) 733.2
Net ProfitNet ProfitNet ProfitNet Profit 804804804804 873873873873 1,0231,0231,0231,023 27.327.327.327.3 17.217.217.217.2
Growth (%)
Net Interest Income Gth 6.5 (1.3) 4.0
Net Profit Gth 25.7 7.3 17.2
Key ratio (%)
NIM 2.7 2.6 2.6
NPL ratio 3.4 3.2 3.2
Loan-to deposit 93.3 91.7 88.1
Cost-to-income 58.9 53.6 55.2
Total CAR 13.4 15.6 15.8
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
CIMB Group Hldgs
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
No escape from NIM compression.No escape from NIM compression.No escape from NIM compression.No escape from NIM compression. We expect NIM to contract,
dragged by its Malaysian and Indonesian operations. In
Malaysia, deposit competition remains rife while in Indonesia,
CIMB Niaga is shifting its focus to better quality loans, putting
pressure on asset yields.
We forecast We forecast We forecast We forecast 5%5%5%5% loan growth in FY16loan growth in FY16loan growth in FY16loan growth in FY16. Targeting 6% may even
pose a challenge given 9M16 YTD loan growth of 2%. Loan
growth has been driven by its Malaysian consumer operations
but expect loan growth to stay dull in Indonesia, Singapore and
Thailand. CIMB continues to shed expensive deposits and focus
on CASA but even then it was unable to fend off funding cost
pressures in Malaysian. We assume deposits will grow at the
same pace as loans, keeping the loan-to-deposit ratio intact.
Capital markets still soft.Capital markets still soft.Capital markets still soft.Capital markets still soft. Although a pick-up was noted in 2Q
and 3Q16, capital markets as a whole is expected to stay soft
compared to previous years. CIMB regularly tops the Malaysian
league table for equity and debt issuance, and is one of the key
players within the ASEAN region. Growth of non-interest
income is likely to stay muted.
Cost management is the key focus for CIMB Cost management is the key focus for CIMB Cost management is the key focus for CIMB Cost management is the key focus for CIMB as it aspires to
drive cost-to-income ratio to below 50% by FY18. To achieve
this, CIMB is looking to reduce the overall IB operating cost and
realign its cost structure and operating efficiencies. CIMB did a
voluntary Mutual Separation Scheme (MSS) in May 2015 for
employees in Malaysia and Indonesia as part of this initiative.
The materialisation of the joint-venture arrangement for its
stockbroking business with China Galaxy could further
accelerate cost reduction.
Regional performance remains a drag in 2016.Regional performance remains a drag in 2016.Regional performance remains a drag in 2016.Regional performance remains a drag in 2016. Historically,
overseas operations contribute 40% of CIMB’s total PBT, with
Indonesia taking the lead at 30%, followed by Thailand and
Singapore at c.5% each. However, the Indonesian operations
have been plagued by high provisions since 4Q14, resulting in
its contribution declining significantly. We expect CIMB Niaga’s
performance to remain dismal in FY16.
T18 transformation targets may be challenginT18 transformation targets may be challenginT18 transformation targets may be challenginT18 transformation targets may be challenging to achieve. g to achieve. g to achieve. g to achieve. The
T18 plan kicked off in 1Q15 with a reorganisation
encompassing changes to key management positions and a
shift to more regional-focused entities. CIMB strives to reduce
costs (targeted at its overall processes and investment banking
division) and build up three key businesses (Commercial and
SME Banking, Transaction Banking and Digital Banking). The
T18 initiatives aim to reduce the cost-to-income ratio to below
50%, increase consumer banking contribution to 60% of
income and targeting CET1 ratio to hit 11%, but we view these
as challenging targets.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
2.4%
2.5%
2.6%
2.7%
2.8%
2.9%
3.0%
3.1%
0
2,000
4,000
6,000
8,000
10,000
2014A 2015A 2016F 2017F 2018F
RM m
Net Interest Income Net Interest Income Margin
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2014A 2015A 2016F 2017F 2018F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2014A 2015A 2016F 2017F 2018F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
81%
83%
85%
87%
89%
91%
93%
95%
97%
99%
101%
232,213
282,213
332,213
382,213
432,213
2014A 2015A 2016F 2017F 2018F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
53.0%
54.0%
55.0%
56.0%
57.0%
58.0%
59.0%
60.0%
61.0%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2014A 2015A 2016F 2017F 2018F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
CIMB Group Hldgs
Balance Sheet:
Asset quality issues in Singapore and Thailand; Indonesia Asset quality issues in Singapore and Thailand; Indonesia Asset quality issues in Singapore and Thailand; Indonesia Asset quality issues in Singapore and Thailand; Indonesia
stabilising but warrants attention. stabilising but warrants attention. stabilising but warrants attention. stabilising but warrants attention. CIMB Niaga's outlook
remains uncertain and we would not discount the possibility of
some stress in its retail portfolio. CIMB’s NPL ratio is the highest
among peers at c.3% (vs industry average of less than 2%).
Meanwhile, in Malaysia, asset quality has remained surprisingly
benign.
CIMB’s CETCIMB’s CETCIMB’s CETCIMB’s CET----1 ratio picking up as it optimises its risk1 ratio picking up as it optimises its risk1 ratio picking up as it optimises its risk1 ratio picking up as it optimises its risk----weighted weighted weighted weighted
assets. assets. assets. assets. Management guided for no capital raising but it is
instead looking at initiatives to optimise risk-weighted assets.
Meanwhile, we believe CIMB’s dividend reinvestment plan (DRP)
will remain in place to provide support to its capital position.
Under T18, CIMB is targeting CET-1 to surpass 11% by 2018,
which we believe is a challenge.
Share Price Drivers:
Limited valuation upside. Limited valuation upside. Limited valuation upside. Limited valuation upside. CIMB is currently trading just below
1.0x BV, which is significantly below its average mean valuation.
Although valuations are undemanding, a pick-up in earnings
momentum remains uncertain as the operating environment
remains a challenge. So, as long as there is no visibility for an
earnings pick-up, we expect valuations to stay range-bound.
ShortShortShortShort----term pain for longterm pain for longterm pain for longterm pain for long----term gain.term gain.term gain.term gain. Delivery of the T18 strategy
would be a re-rating catalyst for CIMB. Post-restructuring, CIMB
will be a leaner outfit with improved cost efficiency. In our view,
the bank will subsequently emerge as a sturdier organisation to
strengthen its footing, especially within the commercial banking
space.
Key Risks:
Ability to rebuild Indonesian business. Ability to rebuild Indonesian business. Ability to rebuild Indonesian business. Ability to rebuild Indonesian business. Expect Indonesian
operations to remain soft in 2H16 and if momentum does not
pick up in 2017, there could be downside risk to earnings.
Delays in Delays in Delays in Delays in delivery of T18 strategies. delivery of T18 strategies. delivery of T18 strategies. delivery of T18 strategies. Although the 3-year plan
with costs as its initial key agenda paints a positive picture for
the group for the longer term, cost overruns could derail its
aim to achieve >15% ROE by FY18. The consumer banking
business is not easy to build up and the group may not achieve
60% income contribution from this segment.
Company Background
CIMB Group Holdings Berhad provides commercial banking
and related financial services. The company and its subsidiaries
operate as a regional universal bank, offering a full range of
financial products and services, covering corporate and
investment banking, consumer banking, treasury and asset
management.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2014A 2015A 2016F 2017F 2018F
NPL Ratio Provision Charge-Off Rate
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
2014A 2015A 2016F 2017F 2018F
Tier-1 CAR Total CAR
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
2014A 2015A 2016F 2017F 2018F
Avg: 15.3x
+1sd: 18.9x
+2sd: 22.6x
-1sd: 11.6x
-2sd: 8x7.1
9.1
11.1
13.1
15.1
17.1
19.1
21.1
23.1
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 1.44x
+1sd: 1.87x
+2sd: 2.3x
-1sd: 1x
-2sd: 0.57x0.5
1.0
1.5
2.0
2.5
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
CIMB Group Hldgs
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Loans Growth 12.8 12.5 5.0 6.0 8.0
Customer Deposits Growth 7.2 12.5 6.0 6.0 8.0
Yld. On Earnings Assets 4.4 4.5 4.4 4.3 4.3
Avg Cost Of Funds 2.1 2.2 2.2 2.2 2.2
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Net Interest Income 8,656 9,337 9,893 10,190 10,875
Islamic Income 1,461 1,569 1,695 1,830 1,977
Non-Interest Income 3,931 4,489 4,219 4,338 4,459
Operating IncomeOperating IncomeOperating IncomeOperating Income 14,04814,04814,04814,048 15,39515,39515,39515,395 15,80715,80715,80715,807 16,35716,35716,35716,357 17,31117,31117,31117,311
Operating Expenses (8,292) (9,249) (8,793) (9,251) (9,734)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 5,7565,7565,7565,756 6,1466,1466,1466,146 7,0147,0147,0147,014 7,1067,1067,1067,106 7,5767,5767,5767,576
Provisions (1,701) (2,318) (2,290) (1,816) (1,780)
Associates 123 85.6 111 122 135
Exceptionals 98.0 1.14 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 4,2764,2764,2764,276 3,9143,9143,9143,914 4,8364,8364,8364,836 5,4125,4125,4125,412 5,9315,9315,9315,931
Taxation (1,102) (1,018) (1,209) (1,353) (1,483)
Minority Interests (67.8) (46.4) (53.4) (61.4) (70.6)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 3,1073,1073,1073,107 2,8502,8502,8502,850 3,5733,5733,5733,573 3,9983,9983,9983,998 4,3784,3784,3784,378
Net Profit bef Except 3,009 2,848 3,573 3,998 4,378
Growth (%)
Net Interest Income Gth 8.8 7.9 6.0 3.0 6.7
Net Profit Gth (31.6) (8.3) 25.4 11.9 9.5
Margins, Costs & Efficiency (%)
Spread 2.4 2.3 2.3 2.1 2.1
Net Interest Margin 2.8 2.7 2.7 2.6 2.5
Cost-to-Income Ratio 59.0 60.1 55.6 56.6 56.2
Business Mix (%)
Net Int. Inc / Opg Inc. 61.6 60.6 62.6 62.3 62.8
Non-Int. Inc / Opg inc. 28.0 29.2 26.7 26.5 25.8
Fee Inc / Opg Income 13.5 12.8 12.7 12.6 12.3
Oth Non-Int Inc/Opg Inc 14.4 16.4 14.0 13.9 13.5
Profitability (%)
ROAE Pre Ex. 8.9 7.3 8.4 8.6 8.7
ROAE 9.2 7.3 8.4 8.6 8.7
ROA Pre Ex. 0.8 0.7 0.8 0.8 0.8
ROA 0.8 0.7 0.8 0.8 0.8
Source: Company, DBS Bank
Plagued by restructuring costs related to the investment banking (IB) rationalisation in 1Q15 (RM202m) and MSS costs over 2Q-3Q15 (RM450m)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
CIMB Group Hldgs
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016
Net Interest Income 2,416 2,461 2,384 2,352 2,445
Islamic Income 386 417 438 413 425
Non-Interest Income 1,038 1,167 904 1,138 1,103
Operating IncomeOperating IncomeOperating IncomeOperating Income 3,8403,8403,8403,840 4,0454,0454,0454,045 3,7253,7253,7253,725 3,9033,9033,9033,903 3,9743,9743,9743,974
Operating Expenses (2,261) (2,211) (2,137) (2,091) (2,193)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,5801,5801,5801,580 1,8331,8331,8331,833 1,5881,5881,5881,588 1,8121,8121,8121,812 1,7811,7811,7811,781
Provisions (529) (717) (515) (657) (586)
Associates 23.7 19.3 49.8 33.5 15.6
Exceptionals 0.0 (3.1) 0.0 0.0 150
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,0751,0751,0751,075 1,1321,1321,1321,132 1,1231,1231,1231,123 1,1891,1891,1891,189 1,3611,3611,3611,361
Taxation (256) (297) (293) (313) (312)
Minority Interests (14.3) (9.9) (16.0) (3.1) (25.7)
Net ProfitNet ProfitNet ProfitNet Profit 804804804804 826826826826 814814814814 873873873873 1,0231,0231,0231,023
Growth (%)
Net Interest Income Gth 6.5 1.9 (3.1) (1.3) 4.0
Net Profit Gth 25.7 2.7 (1.4) 7.3 17.2
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Cash/Bank Balance 33,463 29,319 28,190 28,143 32,791
Government Securities 4,758 9,714 14,571 21,857 32,785
Inter Bank Assets 4,239 1,829 1,738 1,651 1,569
Total Net Loans & Advs. 258,015 290,296 304,402 322,568 348,515
Investment 81,535 90,916 102,797 116,460 132,173
Associates 1,086 1,037 1,141 1,255 1,381
Fixed Assets 1,607 2,404 3,364 4,710 6,594
Goodwill 9,762 10,118 10,118 10,118 10,118
Other Assets 19,692 25,944 28,084 30,510 33,409
Total AssetsTotal AssetsTotal AssetsTotal Assets 414,156414,156414,156414,156 461,577461,577461,577461,577 494,406494,406494,406494,406 537,272537,272537,272537,272 599,334599,334599,334599,334
Customer Deposits 282,069 317,424 336,469 356,657 385,190
Inter Bank Deposits 32,150 23,692 17,459 12,866 9,481
Debts/Borrowings 30,310 34,009 38,382 43,561 49,703
Others 31,237 44,220 56,417 74,673 101,257
Minorities 831 982 1,035 1,097 1,167
Shareholders' Funds 37,560 41,251 44,642 48,419 52,536
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 414,156414,156414,156414,156 461,577461,577461,577461,577 494,406494,406494,406494,406 537,272537,272537,272537,272 599,334599,334599,334599,334
Source: Company, DBS Bank
3Q16 earnings lifted by lower provisions and one-off gain from sale of stake in Sun Life insurance
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
CIMB Group Hldgs
Financial Stability Measures (%)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 91.5 91.5 90.5 90.4 90.5
Net Loans / Total Assets 62.3 62.9 61.6 60.0 58.2
Investment / Total Assets 19.7 19.7 20.8 21.7 22.1
Cust . Dep./Int. Bear. Liab. 81.9 84.6 85.8 86.3 86.7
Interbank Dep / Int. Bear. 9.3 6.3 4.5 3.1 2.1
Asset Quality
NPL / Total Gross Loans 3.1 3.0 3.2 3.2 3.1
NPL / Total Assets 2.0 2.0 2.0 1.9 1.8
Loan Loss Reserve Coverage 82.7 84.7 84.7 87.0 88.6
Provision Charge-Off Rate 0.6 0.8 0.7 0.5 0.5
Capital Strength
Total CAR 15.1 16.1 16.8 16.1 15.1
Tier-1 CAR 12.2 12.8 13.6 13.2 12.5
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 4.47 4.80 HOLD
2: 26 Feb 16 4.42 4.60 HOLD
3: 21 Apr 16 4.86 4.60 HOLD
4: 27 May 16 4.32 4.60 HOLD
5: 20 Jul 16 4.19 4.60 HOLD
6: 05 Sep 16 4.74 4.80 HOLD
7: 31 Oct 16 5.03 4.80 HOLD
8: 17 Nov 16 4.70 4.80 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
5
67
8
3.70
3.90
4.10
4.30
4.50
4.70
4.90
5.10
5.30
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
NPL ratios highest among peers
ASIAN INSIGHTS VICKERS SECURITIES ed: CK/ sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM13.48 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM15.00 (11% upside) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Improved earnings traction
Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish on non-interest income growth as
we expect HLB’s wealth management contribution to gain traction
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • Resilient 1QFY17 earnings supported by solid revenue growth; associate contribution improved
• NIM expansion from effective funding cost management; loan growth led by mortgage and SME segments
• Retaining cautious stance and ROE target of 10-11% for FY17F
• Maintain BUY, RM15.00 TP
Price Relative
Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Pre-prov. Profit 2,263 2,521 2,811 3,153 Net Profit 1,903 2,265 2,497 2,773 Net Pft (Pre Ex.) 2,041 2,265 2,497 2,773 Net Pft Gth (Pre-ex) (%) (6.7) 11.0 10.2 11.1 EPS (sen) 87.8 104 115 128 EPS Pre Ex. (sen) 94.1 104 115 128 EPS Gth Pre Ex (%) (10) 11 10 11 Diluted EPS (sen) 87.8 104 115 128 PE Pre Ex. (X) 14.3 12.9 11.7 10.5 Net DPS (sen) 41.0 38.6 39.9 42.2 Div Yield (%) 3.0 2.9 3.0 3.1 ROAE Pre Ex. (%) 10.0 10.4 10.7 11.0 ROAE (%) 10.0 10.4 10.7 11.0 ROA (%) 1.0 1.2 1.2 1.3 BV Per Share (sen) 974 1,040 1,115 1,201 P/Book Value (x) 1.4 1.3 1.2 1.1 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 105 110 113
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 3 S: 9 H: 9
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Growing from strength to strength
BackedBackedBackedBacked by solid fundamentals; BUY.by solid fundamentals; BUY.by solid fundamentals; BUY.by solid fundamentals; BUY. Hong Leong Bank’s (HLB) banking franchise remains undervalued in our view. We believe the market is not attributing sufficient premium to its key attributes of solid asset quality indicators and strong liquidity position. In this current uncertain environment, balancing liquidity versus profitability will be crucial. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate remains a wildcard; it has shown improvement in the recent quarter. Sturdy start to the financial yearSturdy start to the financial yearSturdy start to the financial yearSturdy start to the financial year.... HLB registered robust earnings growth in 1QFY17, underpinned by solid income growth. Net interest income was led by loan growth of 4% y-o-y/0.3% q-o-q and NIM uplift (from effective funding cost management). Meanwhile, treasury gains propped up non-interest income growth. Positively, contribution from Bank of Chengdu has improved, thanks to cost discipline and decline in provisions. Liquidity continues to be a strong point for HLB, as its loan-to-deposit ratio was kept low at c.80%. NPL ratio stood stable and low at 0.8% despite the classification of one account. Cautious outlook for FY17F. Cautious outlook for FY17F. Cautious outlook for FY17F. Cautious outlook for FY17F. FY17F targets were retained, and appear to skew towards a cautious mode with loan growth expected to at least track industry levels. Deposits would likely grow at the same pace. HLB aims to keep NIM stable by managing its liability mix, as demonstrated in 1QFY17. Non-interest income to total income ratio is targeted at above 25%, driven by transactions and customer flows. Cost-to-income ratio is targeted to be below 46%. Credit costs excluding recoveries are guided to normalise at 25-35bps; there are still some recoveries that could be expected but chunky ones are largely done. Post-rights and with slower growth expected, ROE is targeted at 10-11%. Valuation: HLB is a BUY, with a target price of RM15.00.HLB is a BUY, with a target price of RM15.00.HLB is a BUY, with a target price of RM15.00.HLB is a BUY, with a target price of RM15.00. Our TP is derived using the Gordon Growth Model and assumes 11% ROE, 9% cost of equity and 4% long-term growth rate; it implies 1.4x CY17 BV. Key Risks to Our View: SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans. Inability to deliver growth plans for wealth management and excessive NIM compression could limit earnings growth. At A Glance Issued Capital (m shrs) 2,052
Mkt. Cap (RMm/US$m) 27,663 / 6,219
Major Shareholders (%)
Hong Leong Financial Group (%) 64.4 EPF (%) 14.0 Free Float (%) 21.6
3m Avg. Daily Val (US$m) 1.9
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
Hong Leong Bank Version 6 | Bloomberg: HLBK MK | Reuters: HLBB.KL Refer to important disclosures at the end of this report
72
92
112
132
152
172
192
212
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
Hong Leong Bank (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 42
Company Guide
Hong Leong Bank
WHAT’S NEW
Starting the year on a strong footing
HighlightsHighlightsHighlightsHighlights
Earnings boosted by strong topline growthEarnings boosted by strong topline growthEarnings boosted by strong topline growthEarnings boosted by strong topline growth. HLB’s 1QFY17 net
profit of RM543m was within expectations. Net profit grew
strongly y-o-y, on the back of robust income growth. Net
interest income was underpinned by expansion in NIM as yields
were largely stable while cost of funds fell (from maturity of
higher cost deposits). Meanwhile, non-interest income was
boosted by treasury income. Expenses were higher due to
increase in personnel and marketing costs, but cost-to-income
ratio was kept at 45%. Income from associate, Bank of
Chengdu, has improved – thanks to cost discipline and decline
in provisions. On a q-o-q basis, earnings were lower as
provisions normalised (as opposed to write backs in previous
quarter).
Loan growth driven by mortgage and SME; Loan growth driven by mortgage and SME; Loan growth driven by mortgage and SME; Loan growth driven by mortgage and SME; liquidity remains liquidity remains liquidity remains liquidity remains
ample. ample. ample. ample. Loan growth stood at 4% y-o-y/0.3% q-o-, largely
driven by mortgage and SME, which are in line with HLB’s
targeted segments. Deposit grew at 3% y-o-y/1% q-o-q, led
by fixed deposits. Liquidity remains healthy as the loan-to-
deposit ratio was kept low at 80%.
Stable asset quality indicatorsStable asset quality indicatorsStable asset quality indicatorsStable asset quality indicators. Impaired loans ratio was largely
stable at 0.84%. Exposure to oil and gas (<1% of total loans)
in addition to commodities was relatively unchanged at 3% of
total loans. Loan loss coverage remains relatively high at 113%
(excluding regulatory reserve). Higher impaired loans were
noted in the working capital segment q-o-q and this was
attributed to an oil and gas account. Little provisions were
required as the account is largely secured.
Capital ratios remained robust.Capital ratios remained robust.Capital ratios remained robust.Capital ratios remained robust. CET1/Tier-1/Total capital ratio
stood at 12.9%/13.3%/14.8% for the quarter. No dividends
were declared.
OutlookOutlookOutlookOutlook
KeepingKeepingKeepingKeeping cautious stancecautious stancecautious stancecautious stance for FY17Ffor FY17Ffor FY17Ffor FY17F. FY17F targets were
retained, and appear to skew towards a cautious mode with
loan growth expected to at least track industry levels. It is
crucial to manage loan growth to ensure NIM trends would
not be significantly compromised. Deposits would likely grow
at the same pace, keeping the loan-to-deposit ratio at c.80%.
HLB aims to keep NIM stable by managing its liability mix, as
demonstrated in 1QFY17. Non-interest income to total income
ratio is targeted at above 25%, driven by transactions and
customer flows. Cost savings from the MSS will be reinvested
to enhance digital capabilities. Digital-banking initiatives are
expected to drive transaction banking volumes higher over
time. Cost-to-income ratio is targeted to be below 46%.
Credit costs excluding recoveries are guided to normalise at
25-35bps; there are still some recoveries that could be
expected but chunky ones are largely done. Post-rights and
with slower growth expected, ROE is targeted at 10-11%.
ValuationValuationValuationValuation
Maintain BUY with RM15.00 TPMaintain BUY with RM15.00 TPMaintain BUY with RM15.00 TPMaintain BUY with RM15.00 TP. We keep our earnings
forecast and TP unchanged, as HLB’s 1QFY17 trends were in
line with our expectations. HLB’s banking franchise remains
undervalued in our view. We believe market is not attributing
sufficient premium to its key attributes of solid asset quality
indicators and strong liquidity position. Our TP of RM15.00 is
based on the Gordon Growth Model and implies 1.4x CY17
BV. Our TP assumes 11% ROE, 9% cost of equity and 4%
long-term growth rate.
ASIAN INSIGHTS VICKERS SECURITIES
Page 43
Company Guide
Hong Leong Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 660 663 690 4.6 4.1
Islamic Income 115 121 130 13.2 13.2
Non-Interest Income 249 295 276 11.0 (6.3)
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0231,0231,0231,023 1,0791,0791,0791,079 1,0961,0961,0961,096 7.17.17.17.1 1.61.61.61.6
Operating Expenses (463) (494) (491) 6.0 (0.6)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 561561561561 585585585585 606606606606 8.08.08.08.0 3.53.53.53.5
Provisions (21.1) 54.1 (26.4) 25.0 (148.9)
Associates 85.5 85.3 95.5 11.7 11.9
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 625625625625 724724724724 675675675675 8.08.08.08.0 (6.9)(6.9)(6.9)(6.9)
Taxation (122) (166) (132) 8.3 (20.4)
Minority Interests 0.0 0.0 0.0 nm nm
Net ProfitNet ProfitNet ProfitNet Profit 503503503503 559559559559 543543543543 7.97.97.97.9 (2.8)(2.8)(2.8)(2.8)
Growth (%)
Net Interest Income Gth 0.4 1.3 4.1
Net Profit Gth (18.2) 12.2 (2.8)
Key ratio (%)
NIM 1.8 1.8 1.9
NPL ratio 0.8 0.8 0.8
Loan-to-deposit 80.1 80.4 80.3
Cost-to-income 45.2 45.8 44.8
Total CAR 13.7 14.7 14.8
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
Page 44
Company Guide
Hong Leong Bank
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable. Although we expect
funding cost pressures, we believe HLB’s active treasury
functions would strive to keep NIM as stable as possible. CASA,
as a low-cost funding source, should help to alleviate NIM
compression as well. HLB’s CASA-to-total deposits ratio
currently stands at 26% of total deposits and it intends to build
up this portfolio to 28-30% over the next 3-5 years.
Room to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loan----totototo----deposit ratio is still deposit ratio is still deposit ratio is still deposit ratio is still
among the lowestamong the lowestamong the lowestamong the lowest. HLB’s loan growth is driven by mortgage
and SME loans. We are assuming 6% loan growth in our
forecasts, while deposit should track loan growth. With a loan-
to-deposit ratio still among the lowest in the industry, HLB
would have room to further leverage its asset-liability mix to
accelerate loan growth and optimise NIM. We expect its loan-
to-deposit ratio to hover around 80%.
Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver. Recurring fee income
(loan-related and credit card fees) remains HLB’s key non-
interest income driver. However, it is also building up income
from wealth management. HLB has established a regional
wealth management and private banking platform in Singapore.
Wealth management is expected to be HLB’s new growth driver
as it gradually gains prominence.
Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues. From a business-as-usual (BAU)
perspective, costs should remain nimble, and cost-to-income
ratio should hover below 45%. HLB announced a Mutual
Separation Scheme (MSS) on 20 Oct which resulted in an
acceptance rate of 12.5%. The MSS cost incurred was RM172m
while savings are expected to be RM109m per annum from as
early as Jan 16. Cost savings are likely to be used for
investments in the bank’s digitisation agenda
Bank of Chengdu contribution should Bank of Chengdu contribution should Bank of Chengdu contribution should Bank of Chengdu contribution should stabilistabilistabilistabilisssseeee, but remains a , but remains a , but remains a , but remains a
wildcard.wildcard.wildcard.wildcard. After a weak showing in FY16, BOCD is expected to
see its NPLs peak out by 1QFY17 given the signs of stabilising
NPLs in the recent quarters. Our forecast assumes contribution
from BOCD to drop to around 15% of pre-tax profit in FY17-
19F. This, however, remains a wildcard.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.8%
1.8%
1.9%
1.9%
2.0%
2.0%
2.1%
2.1%
0
500
1,000
1,500
2,000
2,500
3,000
2015A 2016A 2017F 2018F 2019F
RM m
Net Interest Income Net Interest Income Margin
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2015A 2016A 2017F 2018F 2019F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2015A 2016A 2017F 2018F 2019F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
71%
73%
75%
77%
79%
81%
83%
85%
87%
89%
100,912
120,912
140,912
160,912
180,912
200,912
2015A 2016A 2017F 2018F 2019F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
36.0%
37.0%
38.0%
39.0%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
47.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
2015A 2016A 2017F 2018F 2019F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
Page 45
Company Guide
Hong Leong Bank
Balance Sheet:
Superior asset quality.Superior asset quality.Superior asset quality.Superior asset quality. At <1%, HLB’s NPL ratio is second only to
Public Bank (PBK). Similar to PBK, HLB also boasts a prudent
credit culture. We expect HLB to continue recording resilient
asset-quality indicators. Normalised credit cost is expected to
hover around 25-35bps, excluding recoveries.
Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights. Post-rights, capital ratios are
now stronger, comfortably above the minimum required CET1
of 9.5% (inclusive of conservation and countercyclical buffers)
by 2019 as per Basel III requirements. Any capital overhang
should be removed with this rights issue. HLB does not have a
dividend reinvestment plan in place, but we expect at least 35%
payout for FY17F.
Share Price Drivers:
Charting the next Charting the next Charting the next Charting the next course.course.course.course. HLB is currently trading below -1SD of
its 10-year P/BV mean. We believe that the current valuation has
unfairly priced this strong banking franchise with solid asset
quality and liquidity indicators. In addition, the stock provides a
decent dividend yield of 3-4%.
Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated. HLB has been
consistently seeing its book value and earnings grow at c.10%
p.a., save for the year when it raised capital to acquire EON
Capital and the recent rights issue. This however, has not been
reflected in its share price performance. Furthermore, we
believe HLB's resilient earnings, with wealth management and
SME businesses as the key drivers, coupled with strong liquidity
indicators and asset-quality parameters, should act as a catalyst
for the stock.
Key Risks:
SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of plans.expected materialisation of plans.expected materialisation of plans.expected materialisation of plans. This could be
due to the inability to deliver growth plans for wealth
management and a slowdown in regional operations. While its
loan-to-deposit ratio is at 80%, which is the lowest among
peers, slower-than-expected loan growth and excessive NIM
compression could limit earnings growth.
Company Background
Hong Leong Bank Berhad provides commercial banking and
related financial services. The company's services include
leasing and hire purchase, nominee, Islamic banking, and unit
trust management.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
2015A 2016A 2017F 2018F 2019F
NPL Ratio Provision Charge-Off Rate
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
2015A 2016A 2017F 2018F 2019F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2015A 2016A 2017F 2018F 2019F
Avg: 13.4x
+1sd: 14x
+2sd: 14.7x
-1sd: 12.8x
-2sd: 12.1x
10.6
11.6
12.6
13.6
14.6
15.6
16.6
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 1.82x
+1sd: 2.15x
+2sd: 2.49x
-1sd: 1.49x
-2sd: 1.15x
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 46
Company Guide
Hong Leong Bank
Key Assumptions
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Gross Loans Growth 8.9 6.3 6.0 6.0 8.0
Customer Deposits Growth 7.7 5.9 6.0 6.0 8.0
Yld. On Earnings Assets 3.7 3.8 3.6 3.6 3.6
Avg Cost Of Funds 2.2 2.2 2.2 2.2 2.2
Income Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Net Interest Income 2,741 2,655 2,765 2,928 3,124
Islamic Income 420 467 514 555 600
Non-Interest Income 906 1,055 1,214 1,359 1,522
Operating IncomeOperating IncomeOperating IncomeOperating Income 4,0674,0674,0674,067 4,1784,1784,1784,178 4,4934,4934,4934,493 4,8424,8424,8424,842 5,2465,2465,2465,246
Operating Expenses (1,859) (1,915) (1,972) (2,031) (2,092)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,2082,2082,2082,208 2,2632,2632,2632,263 2,5212,5212,5212,521 2,8112,8112,8112,811 3,1533,1533,1533,153
Provisions 75.4 (42.8) (114) (158) (207)
Associates 418 333 425 468 520
Exceptionals 45.0 (172) 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 2,7462,7462,7462,746 2,3822,3822,3822,382 2,8322,8322,8322,832 3,1213,1213,1213,121 3,4663,4663,4663,466
Taxation (513) (478) (566) (624) (693)
Minority Interests 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 2,2332,2332,2332,233 1,9031,9031,9031,903 2,2652,2652,2652,265 2,4972,4972,4972,497 2,7732,7732,7732,773
Net Profit bef Except 2,188 2,075 2,265 2,497 2,773
Growth (%)
Net Interest Income Gth 3.0 (3.1) 4.2 5.9 6.7
Net Profit Gth 6.2 (14.8) 19.0 10.2 11.1
Margins, Costs & Efficiency (%)
Spread 1.6 1.5 1.5 1.5 1.5
Net Interest Margin 1.9 1.9 1.9 1.9 1.9
Cost-to-Income Ratio 45.7 45.8 43.9 42.0 39.9
Business Mix (%)
Net Int. Inc / Opg Inc. 67.4 63.6 61.5 60.5 59.5
Non-Int. Inc / Opg inc. 22.3 25.3 27.0 28.1 29.0
Fee Inc / Opg Income 14.8 14.8 15.8 16.4 17.0
Oth Non-Int Inc/Opg Inc 7.5 10.5 11.2 11.7 12.1
Profitability (%)
ROAE Pre Ex. 14.3 10.0 10.4 10.7 11.0
ROAE 14.3 10.0 10.4 10.7 11.0
ROA Pre Ex. 1.2 1.1 1.2 1.2 1.3
ROA 1.3 1.0 1.2 1.2 1.3
Source: Company, DBS Bank
Provisions to normalise over time as recoveries taper off
ASIAN INSIGHTS VICKERS SECURITIES
Page 47
Company Guide
Hong Leong Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017
Net Interest Income 660 678 654 663 690
Islamic Income 115 118 114 121 130
Non-Interest Income 249 278 234 295 276
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0231,0231,0231,023 1,0741,0741,0741,074 1,0021,0021,0021,002 1,0791,0791,0791,079 1,0961,0961,0961,096
Operating Expenses (463) (486) (472) (494) (491)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 561561561561 587587587587 530530530530 585585585585 606606606606
Provisions (21.1) (58.0) (17.7) 54.1 (26.4)
Associates 85.5 68.5 94.2 85.3 95.5
Exceptionals 0.0 (172) 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 625625625625 426426426426 607607607607 724724724724 675675675675
Taxation (122) (81.7) (109) (166) (132)
Minority Interests 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 503503503503 344344344344 498498498498 559559559559 543543543543
Growth (%)
Net Interest Income Gth 0.4 2.7 (3.5) 1.3 4.1
Net Profit Gth (18.2) (31.6) 44.7 12.2 (2.8)
Balance Sheet (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Cash/Bank Balance 6,230 7,474 8,476 9,352 10,922
Government Securities 3,476 4,296 3,853 4,079 4,396
Inter Bank Assets 3,982 2,057 2,160 2,268 2,382
Total Net Loans & Advs. 112,125 119,457 126,451 133,885 144,513
Investment 42,421 41,712 43,797 45,987 48,287
Associates 3,107 3,323 3,747 4,216 4,736
Fixed Assets 679 1,382 1,410 1,438 1,467
Goodwill 2,149 2,096 2,096 2,096 2,096
Other Assets 9,852 8,030 8,190 8,354 8,521
Total AssetsTotal AssetsTotal AssetsTotal Assets 184,020184,020184,020184,020 189,827189,827189,827189,827 200,182200,182200,182200,182 211,676211,676211,676211,676 227,319227,319227,319227,319
Customer Deposits 140,276 148,524 157,435 166,881 180,232
Inter Bank Deposits 7,096 6,201 6,511 6,837 7,179
Debts/Borrowings 8,847 4,523 4,138 4,138 4,138
Others 11,010 9,463 9,550 9,640 9,732
Minorities 0.0 0.0 0.0 0.0 0.0
Shareholders' Funds 16,790 21,117 22,547 24,180 26,038
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 184,020184,020184,020184,020 189,828189,828189,828189,828 200,182200,182200,182200,182 211,676211,676211,676211,676 227,319227,319227,319227,319
Source: Company, DBS Bank
Earnings led by encouraging growth in net interest income and non-interest income
ASIAN INSIGHTS VICKERS SECURITIES
Page 48
Company Guide
Hong Leong Bank
Financial Stability Measures (%)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 79.9 80.4 80.3 80.2 80.2
Net Loans / Total Assets 60.9 62.9 63.2 63.2 63.6
Investment / Total Assets 23.1 22.0 21.9 21.7 21.2
Cust . Dep./Int. Bear. Liab. 89.8 93.3 93.7 93.8 94.1
Interbank Dep / Int. Bear. 4.5 3.9 3.9 3.8 3.7
Asset Quality
NPL / Total Gross Loans 0.8 0.8 0.8 0.8 0.7
NPL / Total Assets 0.5 0.5 0.5 0.5 0.5
Loan Loss Reserve Coverage 136.3 119.8 135.8 150.0 179.5
Provision Charge-Off Rate (0.1) 0.0 0.1 0.1 0.1
Capital Strength
Total CAR 14.7 15.1 15.3 16.1 16.7
Tier-1 CAR 12.3 13.6 13.8 14.7 15.4
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 13.20 14.80 BUY
2: 15 Dec 15 13.40 14.80 BUY
3: 14 Jan 16 13.04 14.80 BUY
4: 22 Jan 16 12.90 14.80 BUY
5: 02 Feb 16 13.36 14.80 BUY
6: 24 Feb 16 13.12 14.70 BUY
7: 01 Mar 16 13.10 14.70 BUY
8: 02 Mar 16 13.16 14.70 BUY
9: 24 Mar 16 13.32 14.70 BUY
10: 04 Apr 16 13.62 14.70 BUY
11: 03 May 16 13.20 14.70 BUY
12: 04 May 16 13.40 14.70 BUY
13: 25 May 16 13.40 14.70 BUY
14: 02 Jun 16 13.16 14.70 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 03 Jun 16 13.16 14.70 BUY
16: 12 Jul 16 13.24 14.70 BUY
17: 14 Jul 16 13.26 14.70 BUY
18: 01 Aug 16 13.22 14.70 BUY
19: 05 Aug 16 13.06 14.70 BUY
20: 30 Aug 16 13.08 15.00 BUY
21: 02 Sep 16 13.10 15.00 BUY
22: 05 Sep 16 13.10 15.00 BUY
23: 06 Oct 16 13.10 15.00 BUY
24: 10 Oct 16 13.16 15.00 BUY
25: 21 Oct 16 13.28 15.00 BUY
26: 24 Oct 16 13.30 15.00 BUY
27: 31 Oct 16 13.32 15.00 BUY
28: 07 Nov 16 13.14 15.00 BUY
29: 23 Nov 16 13.20 15.00 BUY
1
2
3
45
6
7
8
9
10
11
12
1314
15
16
17
18
19
20
21
22
23
24
25
26
2728
29
12.06
12.56
13.06
13.56
14.06
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
Low loan-to-deposit ratio
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM7.88 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM7.50 (5% downside) (Prev RM7.50) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Recovery in asset quality and regional operations
Where we differ:Where we differ:Where we differ:Where we differ: We have imputed higher credit cost assumptions Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 3Q16 earnings within expectations; mainly lifted
by writebacks
• Asset quality remain vulnerable to weakness in oil
and gas sector
• Adjusted earnings on lower loan and deposit
growth assumptions and to account for disposal
gains of Visa shares (FY16F)
• Maintain HOLD with unchanged TP of RM7.50
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Pre-prov. Profit 10,953 10,867 11,195 12,006 Net Profit 6,836 6,260 6,832 7,550 Net Pft (Pre Ex.) 6,836 5,960 6,832 7,550 Net Pft Gth (Pre-ex) (%) 1.8 (12.8) 14.6 10.5 EPS (sen) 71.7 63.0 66.5 71.0 EPS Pre Ex. (sen) 71.7 60.0 66.5 71.0 EPS Gth Pre Ex (%) (3) (16) 11 7 Diluted EPS (sen) 70.0 62.0 65.3 69.8 PE Pre Ex. (X) 11.0 13.1 11.9 11.1 Net DPS (sen) 54.0 46.5 46.8 47.4 Div Yield (%) 6.9 5.9 5.9 6.0 ROAE Pre Ex. (%) 11.9 9.1 10.0 10.6 ROAE (%) 11.9 9.7 10.0 10.6 ROA (%) 1.0 0.9 0.9 1.0 BV Per Share (sen) 632 663 664 669 P/Book Value (x) 1.2 1.2 1.2 1.2 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 61.0 65.8 66.6
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 5 S: 5 H: 12
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Much ado about oil and gas Vulnerability remainsVulnerability remainsVulnerability remainsVulnerability remains; HOLD.; HOLD.; HOLD.; HOLD. Despite showing traction on reclassification of rescheduled and restructured (R&R) loans to performing loans in 3Q16, we remain cautious on Maybank’s (MAY) susceptibility to weakness in the oil and gas sector. Exposure increased (+RM1bn q-o-q) and oil and gas loans under watchlist rose (+RM4bn q-o-q). While dividend yields remain attractive, asset quality would remain a key risk in our view, thus limiting any share price upside.
3Q163Q163Q163Q16 earnings within expectations; largely held up by write earnings within expectations; largely held up by write earnings within expectations; largely held up by write earnings within expectations; largely held up by write backsbacksbacksbacks.... Non-interest income increased on improved trading and forex income. NIM slippage was minimal q-o-q in spite of a 25bps rate cut during the quarter. Loan growth remains muted at +0.4% YTD, led by mortgages and working capital loans but dampened by contraction in loans for construction and purchase of securities. Impaired loans ratio reduced to 2.22% on the back of reclassification of R&R loans. Given the reduction in impaired loans, loan loss coverage was bumped up to 75%.
Aiming lowerAiming lowerAiming lowerAiming lower in FY16in FY16in FY16in FY16.... Loan growth is now expected to range at 2-3% while deposit growth is expected at 3-4%. With hopes pinned on more recoveries, credit cost guidance is at c.50bps. This should translate to ROE of 10.5-11%. This prompted us to lower loan growth and deposit growth assumptions across FY16-18F. For FY16, we have also lowered credit cost assumption and imputed the expected gains from Visa share disposal. All in, our earnings were adjusted by -2% to +8%. Our FY16 credit cost assumption remains higher than guided as we are taking a more cautious view on MAY’s oil and gas exposure.
Valuation: MAY is a HOLD with target price of RM7.50. Our TP is equivalent to 1.1x FY17 BV and based on the Gordon Growth Model (assuming 11% ROE, 4% growth and 10.2% cost of equity). Key Risks to Our View: FasterFasterFasterFaster----thanthanthanthan----expected recoveriesexpected recoveriesexpected recoveriesexpected recoveries.... Our credit cost assumption (63bps) is higher than guided (c.50 bps). Faster-than-expected recoveries may pose upside risk to earnings forecast. Based on our sensitivity analysis, every 10bps reduction in credit cost increases net profit by 5%. At A Glance Issued Capital (m shrs) 10,193
Mkt. Cap (RMm/US$m) 80,322 / 18,056
Major Shareholders (%)
Amanah Saham Bumiputera (%) 37.0 EPF (%) 15.7 Permodalan Nasional Bhd (%) 5.7
Free Float (%) 41.6
3m Avg. Daily Val (US$m) 11.6
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
Maybank Version 5 | Bloomberg: MAY MK | Reuters: MBBM.KL Refer to important disclosures at the end of this report
72
92
112
132
152
172
192
212
6.8
7.8
8.8
9.8
10.8
11.8
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
Maybank (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 50
Company Guide
Maybank
WHAT’S NEW
Lifted by writebacks but asset quality remains vulnerable
HighlightsHighlightsHighlightsHighlights
Earnings largely inEarnings largely inEarnings largely inEarnings largely in----line, supported by write backs in collective line, supported by write backs in collective line, supported by write backs in collective line, supported by write backs in collective
allowances.allowances.allowances.allowances. Non-interest income increased on improved
trading and forex income. Despite the cut in interest rate, MAY
experienced minimal NIM slippage thanks to effective funding
cost management. Loan growth remains muted at -0.7% y-o-
y/ +2.2% q-o-q/ +0.4% YTD, led by mortgages and working
capital but dampened by contraction in loans for construction
and purchase of securities. Deposit (including investment
accounts) growth stood at +5.6% y-o-y/ -0.4% q-o-q/ +2.4%
YTD.
Impaired loansImpaired loansImpaired loansImpaired loans ratio reduced to 2.22%ratio reduced to 2.22%ratio reduced to 2.22%ratio reduced to 2.22% (from 2.34% in 2Q16)
on the back of reclassification of restructured and rescheduled
(R&R) loans to performing status. About RM600m loans were
reclassified. Of this, the bulk came from its Singapore books.
This explains the significant decline in its Singapore impaired
loans ratio to 0.98% (from 1.38%). Given the reduction in
impaired loans, overall loan loss coverage was bumped up to
75% (from 71%). Separately, MAY’s capital ratios remain one
of the highest among peers with CET1/ Tier 1/Total capital
ratio of 13.7/15.4/19.0%.
Much ado about oil and gas.Much ado about oil and gas.Much ado about oil and gas.Much ado about oil and gas. Although impaired loans
reduced, there was a notable increase of c.RM4bn in
borrowers under MAY’s watchlist status. Part of the increase
comprises newly reclassified loans, while the remainder came
from a few concentrated oil and gas accounts from Malaysia.
Management attributes the increase to prudent judgmental
triggers and reiterated that the increase does not necessarily
indicate an imminent increase in restructured and rescheduled
loans. Separately, MAY’s exposure to oil and gas has increased
from 4.19% to 4.31% due to additional loan drawdowns in
Singapore. While management continues to view oil and gas
as a high risk sector, the contention to increase the exposure is
made from assessing borrowers on a case-by-case basis, on
metrics such as certainty of income and strength of
shareholder.
OutlookOutlookOutlookOutlook
Toning down guidanceToning down guidanceToning down guidanceToning down guidance. Given the lacklustre performance thus
far, MAY has toned down its guidance across the board. Loan
growth is now expected to range at 2-3% (previously guidance
8-9%) while deposit growth is expected at 3-4% (previously
10-11%). While MAY is not discounting more R&R incidences,
hopes are still pinned on some accounts exiting the R&R status
(allowed upon observance of continuous repayment for at
least six months). Hence, credit cost was guided at c.50bps
even though YTD credit cost has exceeded this (52bps). This
should translate to ROE of 10.5-11% (previously 11-12%).
Adjust Adjust Adjust Adjust earnings by earnings by earnings by earnings by ----2222 to +8to +8to +8to +8%.%.%.%. To account for the strong write
backs reported this quarter, we lowered our FY16 credit cost
assumption to 63bps (from 70bps). We kept our credit cost
assumption for FY17-18F intact at 43/38bps. Loan and deposit
growth assumptions are also slashed to 3/5/5% (from 5/7/8%)
and 4/5/5% (from 8% each), respectively. We also raised FY16
earnings to impute the gains in disposal of Visa shares
(c.RM407m) announced in mid-November. All in, our earnings
were bumped up in FY16 by 8%, but cut by 2% each for
FY17-18F. Our forecast conservatively assumes provisions will
remain elevated, as we retain our cautious stance on the
vulnerability of MAY’s oil and gas exposure given the increase
in exposure and loans under watchlist for the sector. In this
vein, our forecasted ROE of slightly below 10% is lower vs
MAY’s guidance. Faster-than- expected recoveries and
reclassifications (from impaired to performing loans) may pose
upside risk to our earnings forecast. Based on our sensitivity
analysis, every 10bps reduction in credit cost increases net
profit by 5%.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
Maintain HOLD with Maintain HOLD with Maintain HOLD with Maintain HOLD with unchanged TP of RM7.50.unchanged TP of RM7.50.unchanged TP of RM7.50.unchanged TP of RM7.50. Our TP is
based on 11% ROE, 4% growth and 10.2% cost of equity.
Our TP implies 1.1x FY17 BV. While dividend yields remain
attractive, asset quality would remain a key risk in our view,
thus limiting any share price upside.
ASIAN INSIGHTS VICKERS SECURITIES
Page 51
Company Guide
Maybank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 2,897 2,879 2,828 (2.4) (1.8)
Islamic Income 1,085 1,037 1,009 (7.0) (7.0)
Non-Interest Income 1,766 1,430 1,621 (8.2) 13.3
Operating IncomeOperating IncomeOperating IncomeOperating Income 5,7475,7475,7475,747 5,3465,3465,3465,346 5,4585,4585,4585,458 (5.0)(5.0)(5.0)(5.0) 2.12.12.12.1
Operating Expenses (2,601) (2,624) (2,700) 3.8 2.9
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 3,1463,1463,1463,146 2,7222,7222,7222,722 2,7582,7582,7582,758 (12.3)(12.3)(12.3)(12.3) 1.31.31.31.3
Provisions (797) (1,181) (331) (58.5) (72.0)
Associates 34.2 43.0 29.3 (14.5) (32.0)
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 2,3832,3832,3832,383 1,5841,5841,5841,584 2,4562,4562,4562,456 3.13.13.13.1 55.155.155.155.1
Taxation (457) (385) (593) 29.6 54.0
Minority Interests (26.8) (39.4) (67.9) (153.9) 72.5
Net ProfitNet ProfitNet ProfitNet Profit 1,8991,8991,8991,899 1,1601,1601,1601,160 1,7961,7961,7961,796 (5.4)(5.4)(5.4)(5.4) 54.854.854.854.8
Growth (%)
Net Interest Income Gth 8.1 (0.8) (1.8)
Net Profit Gth 19.8 (18.7) 54.8
Key ratio (%)
NIM 2.5 2.4 2.3
NPL ratio 1.5 2.3 2.2
Loan-to deposit 96.0 92.6 95.0
Cost-to-income 45.3 49.1 49.5
Total CAR 15.0 19.2 19.0
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
Page 52
Company Guide
Maybank
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM trends still on downside bias.NIM trends still on downside bias.NIM trends still on downside bias.NIM trends still on downside bias. OPR cuts could result in
further pressure to its NIM. MAY’s strong CASA growth was,
however, offset by high campaign fixed deposit rates, further
exerting pressure on its funding costs. Renewed competition in
lending rates could push NIM more toward a downside bias.
Sustainable fee income from core banking activities.Sustainable fee income from core banking activities.Sustainable fee income from core banking activities.Sustainable fee income from core banking activities. The
outlook remains cloudy for capital markets, which would drag
market-related income. However, the share of non-interest
income at MAY, which is largely driven by transactional fees
from core banking services, should remain stable. MAY’s solid
deposit franchise and high CASA share give it a natural
advantage over peers to strengthen its transaction banking
segment. MAY’s recurring fee income is high at close to 60% of
non-interest income. Growing fee-based income remains a
strategic priority for MAY.
Guiding for ROE of 10.5Guiding for ROE of 10.5Guiding for ROE of 10.5Guiding for ROE of 10.5----11%11%11%11%.... We expect FY16 loan growth to
moderate to 3%. Along with NIM compression (albeit smaller in
quantum vs FY15) and high credit cost, we expect ROE to be
below MAY’s guidance of 10.5%. Positively, operating costs
should remain well contained. However, slower profit growth
coupled with the expanded equity base arising from the DRP
would drag ROE lower.
Outlook remains uncertain for its regional operations.Outlook remains uncertain for its regional operations.Outlook remains uncertain for its regional operations.Outlook remains uncertain for its regional operations. Maybank
Singapore historically contributes c.16% to group PBT and MAY
is the only Malaysian bank with a Qualified Full Banking (QFB)
licence in Singapore. Over in Indonesia, MAY is represented by
PT Bank Maybank Indonesia Tbk (formerly known as Bank
Internasional Indonesia). Maybank Indonesia which used to
contribute c.8% to group PBT has seen its operations stabilising.
However, the outlook for Indonesia banks remains uncertain as
the momentum has yet to pick up. We conservatively expect
Maybank Indonesia’s earnings to remain sluggish as it focuses
on fixing its books and dealing with costs. Our concern lies with
its Singapore operations which have loans extended to the oil &
gas sector, which continues to be under pressure.
MAY has presence in 18 othMAY has presence in 18 othMAY has presence in 18 othMAY has presence in 18 other countrieser countrieser countrieser countries, but individual
contributions will remain small in the near future. MAY has also
started work to get a toehold in Myanmar following the Central
Bank of Myanmar’s decision to grant a foreign banking licence
in 2014. Overseas operations (ex-Singapore and Indonesia)
contributed c.8% to group PBT in FY15.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
2.2%
2.3%
2.4%
2.5%
2.6%
2.7%
0
2,000
4,000
6,000
8,000
10,000
2014A 2015A 2016F 2017F 2018F
RM m
Net Interest Income Net Interest Income Margin
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
100,000
200,000
300,000
400,000
500,000
2014A 2015A 2016F 2017F 2018F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
100,000
200,000
300,000
400,000
500,000
2014A 2015A 2016F 2017F 2018F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
82%
87%
92%
97%
102%
363,162
413,162
463,162
513,162
563,162
613,162
2014A 2015A 2016F 2017F 2018F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
47.8%
48.0%
48.2%
48.4%
48.6%
48.8%
49.0%
49.2%
49.4%
49.6%
49.8%
0
5,000
10,000
15,000
20,000
2014A 2015A 2016F 2017F 2018F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
Page 53
Company Guide
Maybank
Balance Sheet:
Cautious on asset quality.Cautious on asset quality.Cautious on asset quality.Cautious on asset quality. YTD, MAY has reported blips in NPL.
All eyes will remain on the bank’s asset-quality position,
particularly on its oil & gas exposure. Credit costs are likely to
remain elevated at current levels in FY16F. Faster-than-expected
recoveries and reclassifications (from impaired to performing
loans) may pose upside risk to our earnings forecast. Based on
our sensitivity analysis, every 10bps reduction in credit cost
increases net profit by 5%.
DRP supporting capital ratios.DRP supporting capital ratios.DRP supporting capital ratios.DRP supporting capital ratios. MAY’s capital ratios are high
compared to peers. This is aided by the DRP, which MAY will
continue to utilise as a strategic capital management tool to
build capital, rather than the rights issue option taken by some
of its peers. The DRP has served well to raise and preserve
capital, but if this continues, profit growth must at least equal
or exceed equity base growth to remain accretive. Management
has made it clear that it intends to keep the DRP in view of
capital requirements for certain events on the horizon.
Attractive dividend yield.Attractive dividend yield.Attractive dividend yield.Attractive dividend yield. Maybank has generously paid out
above 70% of profits since FY10, well above its dividend policy
of 40-60%. MAY intends to maintain this level of dividend
payout as long as the DRP remains in place. We have assumed
dividend payout to be c.75%.
Share Price Drivers:
AssetAssetAssetAsset----quality concerns weigh on valuations.quality concerns weigh on valuations.quality concerns weigh on valuations.quality concerns weigh on valuations. Currently trading
at 1.2x FY17 BV, MAY is trading close to -2SD of its 10-year
mean P/BV. We believe valuations are weighed down by
concerns over the bank’s asset quality. Re-rating catalysts could
come from a recovery of its Indonesian operations and the
easing of asset-quality concerns.
Key Risks:
AssetAssetAssetAsset----quality upset.quality upset.quality upset.quality upset. Further asset-quality deterioration could
pose downside risks to our recommendation, target price and
earnings.
Change in Change in Change in Change in dividend policy.dividend policy.dividend policy.dividend policy. A lower dividend payout ratio could
cause MAY to lose its appeal as a yield stock.
Company Background
Malayan Banking Berhad provides commercial and Islamic
banking services in Malaysia, Singapore, and other locations. It
also owns an Indonesian subsidiary from an acquisition it made
in 2008. Through its subsidiaries, the bank provides services
such as general and life insurance, stock and futures broking,
and leasing and factoring.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2014A 2015A 2016F 2017F 2018F
NPL Ratio Provision Charge-Off Rate
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
2014A 2015A 2016F 2017F 2018F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2014A 2015A 2016F 2017F 2018F
Avg: 13.3x
+1sd: 14.1x
+2sd: 14.8x
-1sd: 12.6x
-2sd: 11.8x
10.3
11.3
12.3
13.3
14.3
15.3
16.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 1.63x
+1sd: 1.89x
+2sd: 2.16x
-1sd: 1.36x
-2sd: 1.1x
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 54
Company Guide
Maybank
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Loans Growth 13.3 12.3 3.0 5.0 5.0
Customer Deposits Growth 11.1 8.8 4.0 5.0 5.0
Yld. On Earnings Assets 3.2 3.2 3.2 3.2 3.2
Avg Cost Of Funds 1.6 1.5 1.6 1.7 1.7
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Net Interest Income 9,704 11,114 11,276 11,212 11,584
Islamic Income 3,271 3,939 4,017 4,339 4,686
Non-Interest Income 5,556 6,185 6,168 6,661 7,194
Operating IncomeOperating IncomeOperating IncomeOperating Income 18,53118,53118,53118,531 21,23821,23821,23821,238 21,46121,46121,46121,461 22,21222,21222,21222,212 23,46423,46423,46423,464
Operating Expenses (9,111) (10,285) (10,594) (11,017) (11,458)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 9,4199,4199,4199,419 10,95310,95310,95310,953 10,86710,86710,86710,867 11,19511,19511,19511,195 12,00612,00612,00612,006
Provisions (471) (2,013) (2,965) (2,114) (1,959)
Associates 163 211 222 233 245
Exceptionals 0.0 0.0 400 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 9,1129,1129,1129,112 9,1529,1529,1529,152 8,5248,5248,5248,524 9,3149,3149,3149,314 10,29210,29210,29210,292
Taxation (2,201) (2,165) (2,131) (2,328) (2,573)
Minority Interests (195) (150) (133) (153) (169)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 6,7166,7166,7166,716 6,8366,8366,8366,836 6,2606,2606,2606,260 6,8326,8326,8326,832 7,5507,5507,5507,550
Net Profit bef Except 6,716 6,836 5,860 6,832 7,550
Growth (%)
Net Interest Income Gth 1.2 14.5 1.5 (0.6) 3.3
Net Profit Gth 2.5 1.8 (8.4) 9.1 10.5
Margins, Costs & Efficiency (%)
Spread 1.6 1.6 1.6 1.5 1.5
Net Interest Margin 2.3 2.4 2.3 2.3 2.3
Cost-to-Income Ratio 49.2 48.4 49.4 49.6 48.8
Business Mix (%)
Net Int. Inc / Opg Inc. 52.4 52.3 52.5 50.5 49.4
Non-Int. Inc / Opg inc. 30.0 29.1 28.7 30.0 30.7
Fee Inc / Opg Income 7.7 6.9 6.9 6.8 6.6
Oth Non-Int Inc/Opg Inc 22.3 22.3 21.8 23.2 24.1
Profitability (%)
ROAE Pre Ex. 13.6 11.9 9.1 10.0 10.6
ROAE 13.6 11.9 9.7 10.0 10.6
ROA Pre Ex. 1.2 1.0 0.8 0.9 1.0
ROA 1.2 1.0 0.9 0.9 1.0
Source: Company, DBS Bank
Expect provisions to slow, but remain elevated
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Company Guide
Maybank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016
Net Interest Income 2,897 2,932 2,903 2,879 2,828
Islamic Income 1,085 954 978 1,037 1,009
Non-Interest Income 1,766 1,728 1,511 1,430 1,621
Operating IncomeOperating IncomeOperating IncomeOperating Income 5,7475,7475,7475,747 5,6155,6155,6155,615 5,3925,3925,3925,392 5,3465,3465,3465,346 5,4585,4585,4585,458
Operating Expenses (2,601) (2,776) (2,620) (2,624) (2,700)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 3,1463,1463,1463,146 2,8392,8392,8392,839 2,7722,7722,7722,772 2,7222,7222,7222,722 2,7582,7582,7582,758
Provisions (797) (522) (878) (1,181) (331)
Associates 34.2 59.0 38.2 43.0 29.3
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 2,3832,3832,3832,383 2,3762,3762,3762,376 1,9311,9311,9311,931 1,5841,5841,5841,584 2,4562,4562,4562,456
Taxation (457) (649) (480) (385) (593)
Minority Interests (26.8) (75.3) (24.2) (39.4) (67.9)
Net ProfitNet ProfitNet ProfitNet Profit 1,8991,8991,8991,899 1,6521,6521,6521,652 1,4271,4271,4271,427 1,1601,1601,1601,160 1,7961,7961,7961,796
Growth (%)
Net Interest Income Gth 8.1 1.2 (1.0) (0.8) (1.8)
Net Profit Gth 19.8 (13.0) (13.6) (18.7) 54.8
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Cash/Bank Balance 52,853 55,647 41,802 37,068 31,478
Government Securities 3,625 7,692 8,461 9,308 10,238
Inter Bank Assets 16,106 13,618 14,299 15,014 15,765
Total Net Loans & Advs. 403,513 453,493 466,122 489,381 513,624
Investment 115,911 122,166 134,383 147,821 162,603
Associates 2,528 3,121 3,342 3,575 3,820
Fixed Assets 3,284 3,378 3,547 3,654 3,763
Goodwill 6,261 6,958 6,958 6,958 6,958
Other Assets 31,247 37,915 44,438 51,828 60,880
Total AssetsTotal AssetsTotal AssetsTotal Assets 640,300640,300640,300640,300 708,345708,345708,345708,345 727,928727,928727,928727,928 769,411769,411769,411769,411 814,172814,172814,172814,172
Customer Deposits 439,569 478,151 497,277 522,140 548,247
Inter Bank Deposits 57,387 39,014 40,965 43,013 45,163
Debts/Borrowings 40,064 56,945 62,049 67,664 73,840
Others 23,739 46,882 32,446 36,188 40,497
Minorities 1,767 1,818 1,951 2,104 2,273
Shareholders' Funds 52,975 61,695 67,016 69,456 72,420
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 640,300640,300640,300640,300 708,345708,345708,345708,345 727,928727,928727,928727,928 769,411769,411769,411769,411 814,172814,172814,172814,172
Source: Company, DBS Bank
3Q16 earnings lifted by write backs
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Maybank
Financial Stability Measures (%)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 91.8 94.8 93.7 93.7 93.7
Net Loans / Total Assets 63.0 64.0 64.0 63.6 63.1
Investment / Total Assets 18.1 17.2 18.5 19.2 20.0
Cust . Dep./Int. Bear. Liab. 81.9 83.3 82.8 82.5 82.2
Interbank Dep / Int. Bear. 10.7 6.8 6.8 6.8 6.8
Asset Quality
NPL / Total Gross Loans 1.5 1.9 2.2 2.0 1.9
NPL / Total Assets 1.0 1.2 1.4 1.3 1.2
Loan Loss Reserve Coverage 95.6 72.0 70.3 77.8 84.1
Provision Charge-Off Rate 0.1 0.4 0.6 0.4 0.4
Capital Strength
Total CAR 15.3 16.7 17.9 17.5 17.1
Tier-1 CAR 12.0 13.1 14.4 14.2 14.0
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 8.41 9.00 HOLD
2: 14 Jan 16 8.35 9.00 HOLD
3: 22 Jan 16 8.31 9.00 HOLD
4: 02 Feb 16 8.54 9.00 HOLD
5: 26 Feb 16 8.53 8.90 HOLD
6: 01 Mar 16 8.64 8.90 HOLD
7: 24 Mar 16 8.95 8.90 HOLD
8: 03 May 16 8.78 8.90 HOLD
9: 30 May 16 8.23 8.80 HOLD
10: 02 Jun 16 8.27 8.80 HOLD
11: 04 Jul 16 8.23 8.80 HOLD
12: 12 Jul 16 8.20 8.60 HOLD
13: 14 Jul 16 8.02 8.60 HOLD
14: 01 Aug 16 8.03 8.60 HOLD
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 26 Aug 16 8.00 7.50 HOLD
16: 05 Sep 16 7.89 7.50 HOLD
17: 31 Oct 16 7.90 7.50 HOLD
18: 25 Nov 16 7.80 7.50 HOLD
1
2
3
4 56 7
8
9
10
11
12
13
14
15
16
17
18
7.12
7.62
8.12
8.62
9.12
9.62
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
Low loan loss coverage
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM19.62 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM22.60 (15% upside) (Prev RM22.60) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sustainable and robust earnings deliveries
Where we differ:Where we differ:Where we differ:Where we differ: Our TP is higher than consensus as we believe its
consistent earnings delivery could help re-rate its share price
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 3Q/9M16 earnings within expectations; revenue
growth supported by robust loan growth and stable NIM
• NIM pressure alleviated by lower wholesale funding costs; loan growth still outpacing the industry’s
• Challenges aplenty for the Malaysian banking sector; but expect PBK to defy headwinds and continue to deliver better-than-industry metrics
• Maintain BUY, TP of RM22.60; remains our top pick among Malaysian banks
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Pre-prov. Profit 6,631 6,791 7,413 8,073 Net Profit 5,062 5,106 5,588 6,080 Net Pft (Pre Ex.) 5,062 5,106 5,588 6,080 Net Pft Gth (Pre-ex) (%) 12.0 0.9 9.4 8.8 EPS (sen) 130 132 144 157 EPS Pre Ex. (sen) 130 132 144 157 EPS Gth Pre Ex (%) 12 1 9 9 Diluted EPS (sen) 130 132 144 157 PE Pre Ex. (X) 15.0 14.9 13.6 12.5 Net DPS (sen) 56.0 58.0 62.0 66.0 Div Yield (%) 2.9 3.0 3.2 3.4 ROAE Pre Ex. (%) 17.1 15.6 15.7 15.6 ROAE (%) 17.1 15.6 15.7 15.6 ROA (%) 1.4 1.4 1.4 1.4 BV Per Share (sen) 804 878 960 1,051 P/Book Value (x) 2.4 2.2 2.0 1.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 151 N/A N/A
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 12 S: 3 H: 9
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
The exception to the rule
Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY. Public Bank (PBK) is our top pick among Malaysian banks. Our BUY rating is premised on its sustainable earnings and robust asset quality. Despite macro headwinds, we expect PBK to continue to deliver above-industry growth and dominant market share in mortgages, auto and SME segments. Contribution from the unit trust business will continue to differentiate it from peers. PBK’s ability to safeguard its asset quality despite years of outperforming industry growth attests to the success of its prudent practices.
3Q16/9M3Q16/9M3Q16/9M3Q16/9M16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus expectations.expectations.expectations.expectations. Revenue growth remained strong, underpinned by strong loan/deposit growth (7.2%/7.4% y-o-y respectively), outpacing industry metrics, and surprisingly stable NIM despite the OPR cut in July. We understand that the stable NIM was held up by lower wholesale funding costs which offset most of the re-pricing effect from retail loans. Non-interest income was lower largely due to forex, prompting us to trim our non-interest income forecasts by 4% across FY16-18F. Provisions increased but were still within expectations. Absolute NPLs increased 5% y-o-y, but NPL ratio stayed low at 0.5%. The increase came mainly from its Laos operations; domestic NPLs were largely stable. Residential mortgage NPLs arose from pockets of its mass-market customers but recovery efforts are underway. Positively, impaired loans from the hire-purchase stayed healthy despite earlier caution on the vulnerability of this segment.
Sector will be challenging in Sector will be challenging in Sector will be challenging in Sector will be challenging in 2017201720172017; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. Further cuts in OPR may pose sector-wide downside risk to NIM. Although growth expectations have moderated slightly and the industry appears to be seeing more challenges to come, PBK remains the silver lining in the banking sector as its financial metrics (such as loan growth, deposit growth, asset quality and cost efficiency) remain superior to its peers.
Valuation: Our target price of RM22.60, which implies 2.3x FY17F BV, is derived using the Gordon Growth Model and assumes 9% cost of equity, 4% long-term growth and 16% ROE. PBK’s premium valuation vs. peers is justified, as it continues to deliver solid growth and quality trends, contrary to peers.
Key Risks to Our View: Failure tFailure tFailure tFailure to sustain aboveo sustain aboveo sustain aboveo sustain above----industry growth and asset qualityindustry growth and asset qualityindustry growth and asset qualityindustry growth and asset quality. A key de-rating factor for PBK would be the failure to sustain its excellent growth and asset quality track record, as well as faltering market share in segments which it excels in.
At A Glance Issued Capital (m shrs) 3,861
Mkt. Cap (RMm/US$m) 75,763 / 17,031
Major Shareholders (%)
Tan Sri Dato' Dr Teh Hong Piow (%) 21.8%
Employees Provident Fund (%) 15.4%
Free Float (%) 62.4
3m Avg. Daily Val (US$m) 27.2
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
Public Bank Version 5 | Bloomberg: PBK MK | Reuters: PUBM.KL Refer to important disclosures at the end of this report
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
WHAT’S NEW
Still making headway amid challenging times
HighlightsHighlightsHighlightsHighlights
Strong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growth and stable NIMand stable NIMand stable NIMand stable NIM....
PBK’s net profit came in largely within our and consensus
expectations. Net interest income growth remained strong,
underpinned by stable NIM and strong loan growth of 7.5% y-
o-y. NIM held up, despite the lowering of its Base Rate (BR)
and Base Lending Rate (BLR) by 23bps (effective 27 July)
following a cut in the Overnight Policy Rate (OPR) by 25bps, as
wholesale deposit costs eased, offsetting the effect of the
lower lending yields. Non-interest income fell due to lower
gains on financial instruments and forex transactions. There
were some structural non-operational forex gains recorded last
year which were not recurring. PBK’s cost efficiency remains
best in class, with cost-to-income ratio of 33% (unchanged q-
o-q).
Superior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growth. The segments contributing
to its healthy loan growth include residential and construction
loans. Deposit growth stood at 7.3% y-o-y, led by growth in
fixed deposits (+10% y-o-y). Given the similar growth pace of
its loans and deposits, its loan to deposit ratio was relatively
unchanged at 90%. Annualised domestic loan/deposit growth
stood at 7.2%/7.4% which outpaced industry metrics of
2.8%/-1.4%.
Asset quality in check.Asset quality in check.Asset quality in check.Asset quality in check. Absolute NPLs increased by 5% y-o-y,
attributable to an increase in residential and working capital
impaired loans. Nonetheless, gross NPL ratio remained low at
0.5% (vs the industry’s 1.7%). Provisions increased but were
within expectations, keeping its loan loss coverage ratio high
at 110% (247% including regulatory reserve). No dividends
were declared, as expected. PBK is sufficiently capitalised with
Total/Tier 1/CET1 ratio of 15.2/11.9/11.0%.
OutlookOutlookOutlookOutlook
Further cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMs.... Despite
challenging times ahead, we believe PBK will continue to
deliver sustainable earnings growth. This should be supported
by resilient loan growth, best-in-class cost-to-income ratio, and
unrivalled asset quality. Contribution from its asset
management business will continue to set the bank apart from
peers. Our base-case assumption is for PBK to experience a
slight decline in NIM of 4bps from FY16 to FY17. Deposit
competition which could be seasonal during the yearend
period could etch that trend in 4Q. In the event of further cuts
in OPR, NIM pressure may be more pronounced than expected.
PBK has seen it NIM hold up well despite the OPR cut in July.
The slower forex income trends prompted us to reduce our
FY16-18F earnings forecasts by 4% per annum. As the revision
to our risk-free rate assumption has offset the changes to our
Gordon Growth assumptions, our TP is unchanged.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
Maintain BUY,Maintain BUY,Maintain BUY,Maintain BUY, RM22.60 TP. RM22.60 TP. RM22.60 TP. RM22.60 TP. PBK remains the top pick in our
Malaysian bank universe. Our TP, which implies 2.3x FY17F BV,
is derived using the Gordon Growth Model and assumes 9%
cost of equity, 4% long-term growth and 16% ROE. In our
view, PBK’s premium valuation vs. its Malaysian and ASEAN
peers is justified for a quality defensive bank.
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 1,629 1,700 1,736 6.6 2.2
Islamic Income 211 233 249 18.0 18.0
Non-Interest Income 631 492 482 (23.7) (2.1)
Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4252,4252,4252,425 2,4672,4672,4672,467 (0.2)(0.2)(0.2)(0.2) 1.81.81.81.8
Operating Expenses (741) (803) (815) 9.9 1.5
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,6221,6221,6221,622 1,6521,6521,6521,652 (4.5)(4.5)(4.5)(4.5) 1.91.91.91.9
Provisions (117) (68.9) (93.7) (19.7) 35.9
Associates 0.76 (1.2) (0.4) nm 66.8
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,5521,5521,5521,552 1,5581,5581,5581,558 (3.4)(3.4)(3.4)(3.4) 0.40.40.40.4
Taxation (397) (281) (306) (23.0) 8.8
Minority Interests (15.6) (14.4) (14.4) 7.7 (0.5)
Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,2561,2561,2561,256 1,2381,2381,2381,238 3.13.13.13.1 (1.4)(1.4)(1.4)(1.4)
Growth (%)
Net Interest Income Gth 4.4 0.9 2.2
Net Profit Gth 0.4 2.1 (1.4)
Key ratio (%)
NIM 2.1 2.1 2.2
NPL ratio 0.5 0.5 0.5
Loan-to deposit 89.8 90.5 90.2
Cost-to-income 30.0 33.1 33.0
Total CAR 14.8 15.4 15.2
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures. Like its
peers, PBK expects continued pressure on NIM arising from
higher cost of funds and is guiding for NIM to decline by 8-
10bps in FY16F. PBK will be focusing on garnering core deposits
(CASA and FD) while managing expensive wholesale deposits.
Loan yields are expected to stay stable.
Strong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwinds. PBK has
consistently beat industry loan growth and for 2016, it targets
around 8% growth. The bank expects growth in deposit to be a
tad bit lower at 7%. Despite the weaker consumer sentiment,
we expect loan growth to remain resilient as its key portfolio lies
in the mass market. The bank is expected to maintain its market
share positions, particularly in the mortgages, auto and SME
segments. Consumer loans make up close to 60% of PBK’s loan
book.
Asset management contribution drives nonAsset management contribution drives nonAsset management contribution drives nonAsset management contribution drives non----intereintereintereinterest income.st income.st income.st income.
Sustainable and growing contribution from its asset
management arm, Public Mutual, continues to differentiate PBK
from its peers. Despite the volatile market, Public Mutual
continued to deliver profits and grow its assets under
management (FY15: RM65bn). This business unit is a key driver
of recurring income. PBK’s recurring income to non-interest
income ratio is among the highest in the industry at c.75%. On
top of that, PBK also has a strategic bancassurance partnership
with AIA Group that enables the group to offer life, health and
investment-linked products to its customers. Although
bancassurance’s contribution is still small as a percentage of
non-interest income, its growth has been strong.
PBK has the lowest costPBK has the lowest costPBK has the lowest costPBK has the lowest cost----totototo----income ratioincome ratioincome ratioincome ratio in the industry at
c.30%. The bank intends to keep that under 33% in 2016. We
forecast its cost-to-income ratio to remain flat. The cost
containment measures, coupled with its targeted income
growth, should keep ROE above 16% (taking into account the
full dilution impact of the rights issue completed in July 2014).
Small regional franchise.Small regional franchise.Small regional franchise.Small regional franchise. Apart from domestic operations, PBK
also has a regional presence, in Hong Kong, Sri Lanka, Laos,
Cambodia, and Vietnam. That said, overseas operations remain
a small contributor to PBK, at about 9% of PBT. Since April
2016, PBK has full control of its Vietnam operations. At this
juncture, operations remain small. PBK intends to build its
franchise in Vietnam in the retail segment. While it is still keen
on expanding regionally, PBK’s mode of expansion will remain
organic.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
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Company Guide
Public Bank
Balance Sheet:
Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality. PBK leads the industry in terms of asset
quality with an enviable NPL ratio of 0.5%. The bank’s ability to
safeguard its asset quality despite years of outperforming
industry growth attests to the success of its prudent practices.
Given its strong credit culture, we expect its NPL ratio to remain
low and stable.
PBK is wellPBK is wellPBK is wellPBK is well----capitalised,capitalised,capitalised,capitalised, boosted by the RM5bn rights issue
completed in 2014. PBK aims to keep total capital ratio at not
less than 13%. It does not have a dividend reinvestment plan
but its dividend payout ratio has been stable at slightly more
than 40%.
Share Price Drivers:
PBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peers. This is justified
for a quality defensive bank. PBK is currently trading close to -
2SD of its 10-year P/BV mean. This represents a good
opportunity to accumulate the stock to gain exposure to long-
term sustainable earnings.
Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery. PBK’s consistent earnings delivery
and robust underlying trends amid a challenging operating
environment could act as the key catalysts for the stock.
Key Risks:
Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects. PBK’s consumer
loan growth did not weaken following Bank Negara’s
tightening measures over the last three years, although we
expect pockets of speculative and high-end properties to
soften. As PBK’s key portfolio focus is the mass market, we
expect its loan growth to remain resilient.
Company Background
Public Bank Berhad provides a range of commercial banking
and financial services which include unit trust management,
financing for the purchase of licensed public vehicles, and
other financial services. The group's overseas operations
include branches in Hong Kong, Sri Lanka, Laos, Cambodia,
and Vietnam.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
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Company Guide
Public Bank
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Loans Growth 10.8 11.6 8.0 8.0 8.0
Customer Deposits Growth 10.2 8.9 8.0 8.0 8.0
Yld. On Earnings Assets 4.1 4.2 4.2 4.2 4.1
Avg Cost Of Funds 2.4 2.6 2.6 2.6 2.6
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Net Interest Income 5,930 6,377 6,613 6,994 7,422
Islamic Income 831 829 903 985 1,073
Non-Interest Income 1,912 2,340 2,316 2,676 3,035
Operating IncomeOperating IncomeOperating IncomeOperating Income 8,6738,6738,6738,673 9,5469,5469,5469,546 9,8329,8329,8329,832 10,65510,65510,65510,655 11,53011,53011,53011,530
Operating Expenses (2,606) (2,915) (3,041) (3,241) (3,456)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 6,0676,0676,0676,067 6,6316,6316,6316,631 6,7916,7916,7916,791 7,4137,4137,4137,413 8,0738,0738,0738,073
Provisions (258) (147) (268) (274) (305)
Associates 4.98 7.56 7.56 7.56 7.56
Exceptionals 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 5,8145,8145,8145,814 6,4916,4916,4916,491 6,5306,5306,5306,530 7,1477,1477,1477,147 7,7767,7767,7767,776
Taxation (1,251) (1,370) (1,378) (1,508) (1,641)
Minority Interests (44.5) (59.1) (45.7) (50.0) (54.4)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 4,5194,5194,5194,519 5,0625,0625,0625,062 5,1065,1065,1065,106 5,5885,5885,5885,588 6,0806,0806,0806,080
Net Profit bef Except 4,519 5,062 5,106 5,588 6,080
Growth (%)
Net Interest Income Gth 6.5 7.5 3.7 5.8 6.1
Net Profit Gth 11.2 12.0 0.9 9.4 8.8
Margins, Costs & Efficiency (%)
Spread 1.7 1.6 1.6 1.6 1.5
Net Interest Margin 2.2 2.1 2.1 2.1 2.0
Cost-to-Income Ratio 30.0 30.5 30.9 30.4 30.0
Business Mix (%)
Net Int. Inc / Opg Inc. 68.4 66.8 67.3 65.6 64.4
Non-Int. Inc / Opg inc. 22.0 24.5 23.6 25.1 26.3
Fee Inc / Opg Income 15.9 16.3 16.4 17.4 18.5
Oth Non-Int Inc/Opg Inc 6.1 8.2 7.1 7.7 7.8
Profitability (%)
ROAE Pre Ex. 18.7 17.1 15.6 15.7 15.6
ROAE 18.7 17.1 15.6 15.7 15.6
ROA Pre Ex. 1.4 1.4 1.4 1.4 1.4
ROA 1.4 1.4 1.4 1.4 1.4
Source: Company, DBS Bank
Expect loan growth to outpace the industry’s
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016
Net Interest Income 1,629 1,654 1,685 1,700 1,736
Islamic Income 211 204 227 233 249
Non-Interest Income 631 638 592 492 482
Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4972,4972,4972,497 2,5042,5042,5042,504 2,4252,4252,4252,425 2,4672,4672,4672,467
Operating Expenses (741) (749) (788) (803) (815)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,7481,7481,7481,748 1,7161,7161,7161,716 1,6221,6221,6221,622 1,6521,6521,6521,652
Provisions (117) 106 (67.0) (68.9) (93.7)
Associates 0.76 4.41 2.88 (1.2) (0.4)
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,8581,8581,8581,858 1,6521,6521,6521,652 1,5521,5521,5521,552 1,5581,5581,5581,558
Taxation (397) (351) (407) (281) (306)
Minority Interests (15.6) (14.7) (15.3) (14.4) (14.4)
Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,4921,4921,4921,492 1,2301,2301,2301,230 1,2561,2561,2561,256 1,2381,2381,2381,238
Growth (%)
Net Interest Income Gth 4.4 1.6 1.8 0.9 2.2
Net Profit Gth 0.4 24.2 (17.6) 2.1 (1.4)
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Cash/Bank Balance 16,817 14,831 17,178 19,898 23,052
Government Securities 6,314 4,379 4,817 5,299 5,829
Inter Bank Assets 0.0 0.0 0.0 0.0 0.0
Total Net Loans & Advs. 243,222 271,814 293,529 317,017 342,384
Investment 64,237 54,955 58,361 61,990 65,857
Associates 157 191 191 191 191
Fixed Assets 1,476 1,423 1,494 1,569 1,647
Goodwill 2,083 2,376 2,376 2,376 2,376
Other Assets 11,415 13,789 14,746 15,774 16,879
Total AssetsTotal AssetsTotal AssetsTotal Assets 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215
Customer Deposits 276,540 301,157 325,250 351,270 379,371
Inter Bank Deposits 20,670 9,970 10,966 12,063 13,269
Debts/Borrowings 11,428 11,667 11,667 11,667 11,667
Others 8,209 8,657 9,600 10,674 11,896
Minorities 850 1,077 1,122 1,172 1,227
Shareholders' Funds 28,025 31,231 34,085 37,267 40,784
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215
Source: Company, DBS Bank
Consistent earnings delivery
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
Public Bank
Financial Stability Measures (%)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 88.0 90.3 90.2 90.2 90.3
Net Loans / Total Assets 70.4 74.7 74.7 74.7 74.7
Investment / Total Assets 18.6 15.1 14.9 14.6 14.4
Cust . Dep./Int. Bear. Liab. 89.6 93.3 93.5 93.7 93.8
Interbank Dep / Int. Bear. 6.7 3.1 3.2 3.2 3.3
Asset Quality
NPL / Total Gross Loans 0.6 0.5 0.5 0.4 0.4
NPL / Total Assets 0.4 0.4 0.4 0.3 0.3
Loan Loss Reserve Coverage 122.4 120.8 129.4 135.8 142.5
Provision Charge-Off Rate 0.1 0.1 0.1 0.1 0.1
Capital Strength
Total CAR 15.8 15.5 15.3 15.3 15.4
Tier-1 CAR 12.2 12.0 12.5 12.7 13.0
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
Lowest NPL ratio among peers
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM4.79 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM5.40 (13% upside) (Prev RM5.40) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Cleaner corporate structure with improved ROE
traction from cost savings and materialisation of IGNITE initiatives
Where we differ:Where we differ:Where we differ:Where we differ: Higher credit cost assumption Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 3Q16 earnings improved on lower overall
provisions, higher trading income and lower costs
• Loan momentum still sluggish on corporate loan repayments; trimming loan growth forecasts
• FY16-18F earnings cut by 1-4% on lower loan growth and higher credit cost
• ROE traction improving on better cost discipline;
Maintain BUY with lower TP of RM5.40
Price Relative
Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Pre-prov. Profit 2,398 3,206 3,597 4,002 Net Profit 1,511 1,837 2,247 2,630 Net Pft (Pre Ex.) 1,511 1,837 2,247 2,630 Net Pft Gth (Pre-ex) (%) (25.8) 21.5 22.3 17.0 EPS (sen) 53.5 49.5 55.2 64.0 EPS Pre Ex. (sen) 53.5 49.5 55.2 64.0 EPS Gth Pre Ex (%) (30) (8) 12 16 Diluted EPS (sen) 49.2 45.3 54.9 63.6 PE Pre Ex. (X) 8.9 9.7 8.7 7.5 Net DPS (sen) 12.0 13.6 16.5 19.1 Div Yield (%) 2.5 2.8 3.4 4.0 ROAE Pre Ex. (%) 8.3 8.6 8.6 9.4 ROAE (%) 8.3 8.6 8.6 9.4 ROA (%) 0.7 0.8 0.8 0.9 BV Per Share (sen) 575 621 656 697 P/Book Value (x) 0.8 0.8 0.7 0.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 60.3 64.7 68.0
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 8 S: 4 H: 7
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Keep watch on asset quality
Restructuring upside negated partially by asset quality concerns. Restructuring upside negated partially by asset quality concerns. Restructuring upside negated partially by asset quality concerns. Restructuring upside negated partially by asset quality concerns. With the restructuring overhang removed, RHB should see better share price performance going forward. However, concerns over its asset quality outlook may weigh down valuations in the near term. To see a stronger re-rating beyond 1x BV, we would need a pick-up in business growth on a more sustainable basis and for asset-quality concerns to taper off. RHB is still trading below book value and we believe this partially reflects the concerns over its asset quality. 3Q16 earnings largely in3Q16 earnings largely in3Q16 earnings largely in3Q16 earnings largely in----line; sluggish loan momentumline; sluggish loan momentumline; sluggish loan momentumline; sluggish loan momentum. . . . RHB’s 3Q16 earnings significantly improved in the absence of a one-off huge provision recorded in 2Q16. Excluding this, provisions rose q-o-q on higher NPL incidences, still largely related to the oil & gas sector in Singapore. NIM fell following the OPR cut in July coupled with competitive pressures. Non-interest income surprised on the upside from trading income but this may not recur. Loan growth was sluggish at only 1% 9M16 YTD. Expenses were the only positive trend noted with cost savings still expected ahead. Cut earnings by Cut earnings by Cut earnings by Cut earnings by 1111----4444% for higher credit cost and slower loan % for higher credit cost and slower loan % for higher credit cost and slower loan % for higher credit cost and slower loan growth. growth. growth. growth. We raise our credit cost assumption to 46/35/27bps (from 38/29/27bps) and lower loan growth assumption to 3%/5%/5% across FY16-17F (from 5%/6%/8%). The impact was mitigated by lower expense growth assumption. YTD FY16 loan growth has been flattish. NPL ratio of <2% would also be a challenge if some of its oil & gas borrowers decide to restructure or reschedule loans. Its overseas contribution target of 10% will fall short due to the impairment booked from its Singapore operations. We expect FY16F ROE to stay below its target of 10% but we see RHB’s improved cost efficiency as a bright spot for the bank. Valuation: RHB remains a BUY.RHB remains a BUY.RHB remains a BUY.RHB remains a BUY. RHB continued to trade at below book value, reflecting concerns over its asset-quality outlook, in our view. Our lower TP of RM5.40 (post earnings revision) implies 0.8x FY17 BV and is derived using the Gordon Growth Model (10% ROE, 11% cost of equity and 4% growth). Key Risks to Our View: Further deterioration in asset quality.Further deterioration in asset quality.Further deterioration in asset quality.Further deterioration in asset quality. RHB’s oil & gas and steel exposure comprise 2.8% and 1% of its total loans respectively. Further deterioration in these segments poses earnings risk. At A Glance Issued Capital (m shrs) 3,075
Mkt. Cap (RMm/US$m) 14,728 / 3,311
Major Shareholders (%)
EPF (%) 42.2 Aabar Investment (%) 17.8 OSK Holdings (%) 10.1 Free Float (%) 29.9
3m Avg. Daily Val (US$m) 1.2
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
RHB Bank Version 8 | Bloomberg: RHBBANK MK | Reuters: RHBC.KL Refer to important disclosures at the end of this report
55
75
95
115
135
155
175
195
215
4.1
5.1
6.1
7.1
8.1
9.1
10.1
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
RHB Bank (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
RHB Bank
WHAT’S NEW
Improved cost efficiency but loan growth remains
benign
HighlightsHighlightsHighlightsHighlights
Earnings largely inEarnings largely inEarnings largely inEarnings largely in----line; sluggish loan momentum notedline; sluggish loan momentum notedline; sluggish loan momentum notedline; sluggish loan momentum noted. 3Q16
earnings were largely in-line thanks to lower overall provisions
(recall a one-off provision of RM254m was made in relation to
its exposure to Swiber bonds), higher non-interest income
(trading income and fixed income origination activities) and
lower expenses. NIM fell as a result of loan re-pricing following
the OPR cut in July despite active liability management.
Expenses were lower and further cost savings are expected in
coming quarters. Non-interest income was boosted by trading
gains, but this is unlikely to recur. Loan growth was sluggish
largely due to corporate loan repayments, lower auto loans
and Amanah Saham Bumiputra (ASB) loans, although
mortgages and SME loans grew by 10% YTD each.
International business operations performance was dented by
its Singapore operations.
Additional provisions from higher impaired loans.Additional provisions from higher impaired loans.Additional provisions from higher impaired loans.Additional provisions from higher impaired loans. Impaired
loan ratio rose to 2.3% (2Q16: 2.1%) mainly on account of
additional impaired accounts from the oil & gas sector (two
accounts). The new NPLs were two oil & gas accounts from
Singapore amounting to <RM130m; approximately one-third
was provided for. Provisions were higher q-o-q (excluding the
one-off provisions made for Swiber in 2Q16). Loan loss
coverage fell further to 56% (from 59% in 2Q16). As at end-
3Q16, its oil & gas exposure (loans and bonds) stood at 3.2%
of total loans, while its steel exposure stood at RM2bn (c.1%
of total loans). Restructured and rescheduled (R&R) loans
account for 17% of total impaired loans.
Capital remained strongCapital remained strongCapital remained strongCapital remained strong with CET1, Tier-1 and Total CAR at
13%, 13.3% and 17.1% respectively. No dividends were
declared during the quarter.
OutlookOutlookOutlookOutlook
Earnings trimmed by Earnings trimmed by Earnings trimmed by Earnings trimmed by 1111----4444% over FY16% over FY16% over FY16% over FY16----18F18F18F18F. We reduce our loan
growth assumption to 3% (from 5%) for FY16F as 9M16 YTD
loan growth stayed sluggish at 1%. We opine that RHB will fall
short of its 10% loan growth target for 2016. We have also
reduced our loan growth forecasts for FY17-18F to 5% (from
6%/8%). Loan growth drivers include mortgage and SME
loans and some corporate loan drawdowns. Key risk to our
loan growth forecasts would be further corporate loan
repayments. We raised credit costs over FY16-18F as well (see
paragraph below for details), but this is partially offset by
lower expense growth assumptions in light of RHB’s
commendable cost discipline thus far. As such, we now
assume cost-to-income ratio to stay below 50%, as targeted.
Overall, our FY16-18F earnings are reduced by 1-4%.
AssetAssetAssetAsset----quality issues to linger for a while more.quality issues to linger for a while more.quality issues to linger for a while more.quality issues to linger for a while more. Management
expects NPL ratio to hit a high of 2.3% in FY16F, taking into
account further R&R loans in coming quarters. As such, we
have raised credit costs to 46/35/27bps (from 38/29/27bps)
over FY16-18F. Positively, RHB’s non-corporate book has not
seen any deterioration.
Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation
Maintain BUY, Maintain BUY, Maintain BUY, Maintain BUY, lower TPlower TPlower TPlower TP of of of of RM5.40RM5.40RM5.40RM5.40.... After accounting for the
earnings adjustments, our TP drops to RM5.40 (from RM5.50).
Our TP assumes 10% ROE, 11% cost of equity and 4%
growth and implies 0.8x BV. We maintain our BUY call as we
expect the share price to re-rate on the back of better earnings
traction in FY16 from cost savings despite higher provisions
booked YTD. RHB’s improved cost efficiency is a bright spot for
the bank. However, to see a stronger re-rating beyond 1x BV,
we would need a pick-up in business growth on a more
sustainable basis and for asset-quality concerns to taper off.
RHB is still trading below book value and we believe this
partially reflects the concerns over its asset quality.
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
RHB Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 877 853 849 (3.2) (0.5)
Islamic Income 230 227 234 1.8 1.8
Non-Interest Income 439 509 546 24.3 7.3
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,5461,5461,5461,546 1,5891,5891,5891,589 1,6291,6291,6291,629 5.45.45.45.4 2.52.52.52.5
Operating Expenses (1,166) (808) (827) (29.1) 2.3
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 380380380380 781781781781 803803803803 111.4111.4111.4111.4 2.82.82.82.8
Provisions (50.7) (312) (140) 176.3 (55.1)
Associates 0.11 0.25 0.10 (15.2) (61.2)
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 329329329329 469469469469 663663663663 101.3101.3101.3101.3 41.241.241.241.2
Taxation (99.8) (116) (152) 52.3 31.3
Minority Interests (0.1) (3.4) (5.3) (5,451.0) 56.5
Net ProfitNet ProfitNet ProfitNet Profit 229229229229 350350350350 505505505505 120.4120.4120.4120.4 44.344.344.344.3
Growth (%)
Net Interest Income Gth 8.0 (4.4) (0.5)
Net Profit Gth (59.0) (38.0) 44.3
Key ratio (%)
NIM 2.1 2.1 2.0
NPL ratio 1.9 2.1 2.3
Loan-to deposit 93.0 91.3 91.0
Cost-to-income 75.4 50.9 50.7
Total CAR 15.7 17.2 17.1
Source of all data: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES
Page 68
Company Guide
RHB Bank
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NIM may contract after policy rate cutsNIM may contract after policy rate cutsNIM may contract after policy rate cutsNIM may contract after policy rate cuts. NIM may still see a
slight decline following the policy rate cut. Lending yields are
expected to remain competitive while deposit costs may still stay
high, albeit less intense compared to a year ago. RHB is focused
on driving CASA growth, following its strategy to rebalance its
deposit mix. This is expected to mitigate NIM compression
moving forward.
Improved loan momentumImproved loan momentumImproved loan momentumImproved loan momentum. RHB’s FY15 loan traction was
impacted by a large repayment earlier in the year, resulting in
loan growth of a mere 6%. Loan growth YTD in 2Q16 has been
sluggish. As such FY16F loan growth could at best be at mid-
single-digit levels. These would likely be supported by mortgage
and SME loans.
Enlarged investment banking business has done wellEnlarged investment banking business has done wellEnlarged investment banking business has done wellEnlarged investment banking business has done well. RHB’s
investment banking business is doing well post-OSK acquisition,
with a strong non-interest income lift from higher brokerage
income, fund management and unit trust income, and
corporate advisory and underwriting fees. However, growing
non-interest income will be a challenge going forward, given
that the capital market outlook remains weak. Positively, a pick-
up in wealth management and insurance could mitigate the
weakness from capital market-related fees.
CostCostCostCost----totototo----income ratio higher than industry averageincome ratio higher than industry averageincome ratio higher than industry averageincome ratio higher than industry average. RHB’s cost-
to-income ratio is above the industry average of 50%. To keep
a tighter lid on its cost-to-income ratio, RHB rolled out a Career
Transition Scheme (voluntary staff rationalisation exercise) in
Sep 2015. The exercise was completed in Oct 2015 and resulted
in a headcount cut of 12% of its total workforce. RHB expects
this to bring in cost savings from FY16F onwards. Its cost-to-
income ratio target stands at c.50% in FY16F. We believe this
target would be achieved, driven by its overall cost efficiency
programmes.
International contributionInternational contributionInternational contributionInternational contribution. RHB’s overseas operations are mainly
in Singapore, where it operates seven branches. Other countries
that RHB operates in include Laos, Cambodia and Thailand,
whose contribution remains small to the group. RHB’s
international operations will fall short of its 10% target in FY16F
as its Singapore operations is expected to post losses after a
huge impairment booked in 2Q16.
Corporate restructuring completed.Corporate restructuring completed.Corporate restructuring completed.Corporate restructuring completed. RHB Capital completed a
rights issue of RM2.5bn and an internal restructuring plan in
Dec 2015 and June 2016 respectively. The key differences to be
noted in the financials under RHB (from RHB Capital) include
interest savings and removal of goodwill, coupled with an
enlarged capital base.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.8%
1.9%
1.9%
2.0%
2.0%
2.1%
2.1%
2.2%
2.2%
2.3%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2014A 2015A 2016F 2017F 2018F
RM m
Net Interest Income Net Interest Income Margin
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
2014A 2015A 2016F 2017F 2018F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2014A 2015A 2016F 2017F 2018F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
76%
81%
86%
91%
96%
101%
126,624
146,624
166,624
186,624
206,624
226,624
246,624
266,624
2014A 2015A 2016F 2017F 2018F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2014A 2015A 2016F 2017F 2018F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
RHB Bank
Balance Sheet:
Asset quality to be monitoredAsset quality to be monitoredAsset quality to be monitoredAsset quality to be monitored. RHB suffered from asset-quality
deterioration in early 2013 due to a specific corporate account.
Since then, its gross NPL ratio has been trending down and
management targets to keep it below 2%. With the model risk
adjustment made to its regulatory reserves, its loan loss
coverage should rise close to 75%, inching towards 80% over
time. However, asset-quality risks have risen again in 2Q16 and
RHB is unlikely to keep its NPL ratio target of <2%. Its oil & gas
exposure will continue to be monitored. Potential restructuring
and rescheduling of these loans could push NPL ratios higher.
Stronger capital ratios post restructuring.Stronger capital ratios post restructuring.Stronger capital ratios post restructuring.Stronger capital ratios post restructuring. Under the new
corporate structure, RHB’s capital ratios are now stronger,
comfortably above the minimum required CET1 of 9.5%
(inclusive of conservation and countercyclical buffers) by 2019,
as per Basel III requirements. While its dividend payout ratio was
lower in 2014 and 2015, upon the completion of its corporate
restructuring, we believe RHB could revert to its 30% minimum
payout dividend policy with a dividend reinvestment plan. The
dividend reinvestment plan will require the Board’s approval
given that it is now “new” entity post restructuring.
Share Price Drivers:
RestructuRestructuRestructuRestructuring impact priced in; asset quality only partially priced ring impact priced in; asset quality only partially priced ring impact priced in; asset quality only partially priced ring impact priced in; asset quality only partially priced
in.in.in.in. RHB’s share price has partially priced in the success of its
corporate restructuring and is currently trading below -1SD of
its 5-year P/BV mean. While we believe market has priced in the
cleaner structure post its internal reorganisation, asset-quality
concerns could keep valuations below book value. To see a
stronger re-rating beyond 1x BV, we would need to see a pick-
up in business growth on a more sustainable basis and for
asset-quality concerns to taper off. RHB is still trading below
book value and we believe this partially reflects the concerns on
its asset quality.
Key Risks:
AssetAssetAssetAsset----quality upset.quality upset.quality upset.quality upset. This has been largely priced in, but further
asset-quality deterioration could pose downside risks to our
recommendation, target price and earnings.
Sluggish capital market.Sluggish capital market.Sluggish capital market.Sluggish capital market. Post-acquisition of OSK, RHB is now
one of the key players in the Malaysian capital market. As the
outlook for capital markets remains soft, the growth of non-
interest income could be weaker than expected.
Company Background
RHB Bank Berhad provides commercial and merchant banking
services. Through its subsidiaries, the company provides
finance and leasing services and trades securities. RHB Bank
also provides nominee, unit trust, asset management, and
insurance services.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2014A 2015A 2016F 2017F 2018F
NPL Ratio Provision Charge-Off Rate
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
2014A 2015A 2016F 2017F 2018F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2014A 2015A 2016F 2017F 2018F
Avg: 11.7x
+1sd: 13.5x
+2sd: 15.3x
-1sd: 9.9x
-2sd: 8.1x
7.3
8.3
9.3
10.3
11.3
12.3
13.3
14.3
15.3
16.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 1.12x
+1sd: 1.29x
+2sd: 1.45x
-1sd: 0.96x
-2sd: 0.79x
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
RHB Bank
Key Assumptions
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Gross Loans Growth 17.0 6.3 3.0 5.0 5.0
Customer Deposits Growth 14.1 0.7 8.0 8.0 8.0
Yld. On Earnings Assets 3.9 3.8 3.7 3.7 3.7
Avg Cost Of Funds 2.4 2.4 2.5 2.5 2.5
Income Statement (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Net Interest Income 3,291 3,300 3,519 3,860 4,205
Islamic Income 732 876 937 1,050 1,176
Non-Interest Income 2,211 2,015 2,076 2,180 2,289
Operating IncomeOperating IncomeOperating IncomeOperating Income 6,2356,2356,2356,235 6,1916,1916,1916,191 6,5326,5326,5326,532 7,0897,0897,0897,089 7,6697,6697,6697,669
Operating Expenses (3,411) (3,793) (3,326) (3,492) (3,667)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,8242,8242,8242,824 2,3982,3982,3982,398 3,2063,2063,2063,206 3,5973,5973,5973,597 4,0024,0024,0024,002
Provisions (88.9) (292) (739) (580) (470)
Associates 0.28 0.30 0.45 0.54 0.65
Exceptionals 0.0 0.0 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 2,7352,7352,7352,735 2,1072,1072,1072,107 2,4672,4672,4672,467 3,0183,0183,0183,018 3,5333,5333,5333,533
Taxation (672) (583) (617) (755) (883)
Minority Interests (25.5) (12.6) (13.9) (17.0) (19.9)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 2,0382,0382,0382,038 1,5111,5111,5111,511 1,8371,8371,8371,837 2,2472,2472,2472,247 2,6302,6302,6302,630
Net Profit bef Except 2,038 1,511 1,837 2,247 2,630
Growth (%)
Net Interest Income Gth 0.5 0.3 6.6 9.7 8.9
Net Profit Gth 11.3 (25.8) 21.5 22.3 17.0
Margins, Costs & Efficiency (%)
Spread 1.5 1.3 1.3 1.2 1.2
Net Interest Margin 2.1 2.0 2.0 1.9 1.9
Cost-to-Income Ratio 54.7 61.3 50.9 49.3 47.8
Business Mix (%)
Net Int. Inc / Opg Inc. 52.8 53.3 53.9 54.4 54.8
Non-Int. Inc / Opg inc. 35.5 32.6 31.8 30.7 29.8
Fee Inc / Opg Income 23.3 21.0 20.5 19.8 19.2
Oth Non-Int Inc/Opg Inc 12.2 11.6 11.3 10.9 10.6
Profitability (%)
ROAE Pre Ex. 11.5 8.3 8.6 8.6 9.4
ROAE 11.5 8.3 8.6 8.6 9.4
ROA Pre Ex. 1.0 0.7 0.8 0.8 0.9
ROA 1.0 0.7 0.8 0.8 0.9
Source: Company, DBS Bank
Positive traction from cost savings negated by higher provisions
ASIAN INSIGHTS VICKERS SECURITIES
Page 71
Company Guide
RHB Bank
Quarterly / Interim Income Statement (RMm)
FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016
Net Interest Income 877 872 891 853 849
Islamic Income 230 237 233 227 234
Non-Interest Income 439 573 487 509 546
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,5461,5461,5461,546 1,6821,6821,6821,682 1,6121,6121,6121,612 1,5891,5891,5891,589 1,6291,6291,6291,629
Operating Expenses (1,166) (962) (777) (808) (827)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 380380380380 720720720720 835835835835 781781781781 803803803803
Provisions (50.7) (245) (79.9) (312) (140)
Associates 0.11 0.06 0.06 0.25 0.10
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 329329329329 475475475475 755755755755 469469469469 663663663663
Taxation (99.8) (152) (189) (116) (152)
Minority Interests (0.1) (7.0) (1.8) (3.4) (5.3)
Net ProfitNet ProfitNet ProfitNet Profit 229229229229 316316316316 565565565565 350350350350 505505505505
Growth (%)
Net Interest Income Gth 8.0 (0.5) 2.2 (4.4) (0.5)
Net Profit Gth (59.0) 37.9 78.7 (38.0) 44.3
Balance Sheet (RMm)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Cash/Bank Balance 16,237 12,881 34,099 51,392 72,601
Government Securities 492 188 72.2 75.8 79.6
Inter Bank Assets 2,299 1,199 625 657 690
Total Net Loans & Advs. 140,693 149,580 153,855 161,515 169,554
Investment 43,003 46,897 47,473 48,879 50,352
Associates 21.0 15.8 16.6 17.4 18.3
Fixed Assets 1,031 1,042 1,053 1,064 1,075
Goodwill 5,274 2,649 2,649 2,649 2,649
Other Assets 10,306 13,486 16,164 16,884 17,639
Total AssetsTotal AssetsTotal AssetsTotal Assets 219,354219,354219,354219,354 227,938227,938227,938227,938 256,006256,006256,006256,006 283,132283,132283,132283,132 314,658314,658314,658314,658
Customer Deposits 157,134 158,158 170,810 184,475 199,233
Inter Bank Deposits 21,350 20,646 26,840 34,892 45,359
Debts/Borrowings 12,386 10,737 10,184 11,142 12,196
Others 9,590 20,705 22,985 25,720 28,984
Minorities 99.8 24.6 38.5 55.5 75.4
Shareholders' Funds 18,794 17,668 25,148 26,848 28,810
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 219,354219,354219,354219,354 227,938227,938227,938227,938 256,006256,006256,006256,006 283,132283,132283,132283,132 314,658314,658314,658314,658
Source: Company, DBS Bank
3QFY16 earnings lifted by lower overall provisions, higher trading income and lower expenses
ASIAN INSIGHTS VICKERS SECURITIES
Page 72
Company Guide
RHB Bank
Financial Stability Measures (%)
FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 89.5 94.6 90.1 87.6 85.1
Net Loans / Total Assets 64.1 65.6 60.1 57.0 53.9
Investment / Total Assets 19.6 20.6 18.5 17.3 16.0
Cust . Dep./Int. Bear. Liab. 82.3 83.4 82.2 80.0 77.6
Interbank Dep / Int. Bear. 11.2 10.9 12.9 15.1 17.7
Asset Quality
NPL / Total Gross Loans 2.0 1.9 2.3 2.2 2.1
NPL / Total Assets 1.3 1.2 1.4 1.3 1.2
Loan Loss Reserve Coverage 61.1 63.2 56.4 59.9 63.8
Provision Charge-Off Rate 0.1 0.2 0.5 0.4 0.3
Capital Strength
Total CAR 15.6 15.5 16.4 16.5 16.0
Tier-1 CAR 12.7 12.2 13.4 13.3 12.8
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 5.94 7.10 BUY
2: 22 Jan 16 5.13 7.10 BUY
3: 02 Feb 16 5.47 7.10 BUY
4: 25 Feb 16 5.42 7.10 BUY
5: 29 Feb 16 5.30 7.00 BUY
6: 01 Mar 16 5.40 7.00 BUY
7: 24 Mar 16 5.84 7.00 BUY
8: 15 Apr 16 6.28 7.00 BUY
9: 03 May 16 6.00 7.00 BUY
10: 26 May 16 6.18 7.00 BUY
11: 02 Jun 16 6.10 7.00 BUY
12: 28 Jun 16 4.84 5.30 BUY
13: 12 Jul 16 5.15 5.30 BUY
14: 14 Jul 16 5.15 5.30 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 01 Aug 16 5.09 5.30 BUY
16: 25 Aug 16 4.98 5.50 BUY
17: 05 Sep 16 4.99 5.50 BUY
18: 31 Oct 16 4.83 5.50 BUY
19: 24 Nov 16 4.68 5.40 BUY
1
2 3
4
5
67
8
9
10
11
12 13
14
15
16
17
18
19
4.32
4.82
5.32
5.82
6.32
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
Including regulatory reserves, loan loss coverage should come in at c.75%
ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY
BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM14.84 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM17.00 (15% upside) (Prev RM17.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential corporate streamlining
Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish on HLB’s earnings
Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]
What’s New • 1QFY17 earnings within expectations; strong banking contribution shielded weakness in insurance income
• Expect earnings windfall in 2QFY17 from recent surge in interest rate
• Ceased negotiations on sale of insurance unit; reverting back to business-as-usual mode
• Maintain BUY with lower TP of RM17.00
Price Relative
Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Pre-prov. Profit 2,431 2,798 3,046 3,348 Net Profit 1,359 1,637 1,768 1,929 Net Pft (Pre Ex.) 1,497 1,637 1,768 1,929 Net Pft Gth (Pre-ex) (%) (5.5) 9.3 8.0 9.1 EPS (sen) 118 143 154 168 EPS Pre Ex. (sen) 131 143 154 168 EPS Gth Pre Ex (%) (13) 9 8 9 Diluted EPS (sen) 118 143 154 168 PE Pre Ex. (X) 11.4 10.4 9.6 8.8 Net DPS (sen) 38.0 49.9 39.3 42.9 Div Yield (%) 2.6 3.4 2.6 2.9 ROAE Pre Ex. (%) 10.8 10.4 10.6 10.9 ROAE (%) 9.6 10.4 10.6 10.9 ROA (%) 1.0 1.1 1.2 1.2 BV Per Share (sen) 1,337 1,406 1,494 1,591 P/Book Value (x) 1.1 1.1 1.0 0.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 136 145 157
Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 0 H: 2
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Waiting for action
Corporate streamlining remains a reCorporate streamlining remains a reCorporate streamlining remains a reCorporate streamlining remains a re----rating catalyst, BUY. rating catalyst, BUY. rating catalyst, BUY. rating catalyst, BUY. We believe a corporate streamlining remains on HLFG’s agenda. This investment thesis remains our basis for our BUY rating for Hong Leong Financial Group (HLFG). We had, in the past, considered the possibility of HLFG listing HLAH to unlock value to its shareholders. Nevertheless, we believe that life insurance businesses in Malaysia may remain acquisition targets. While this negotiation has now ceased, we would not discount the possibility of other parties attempting to pursue such a transaction again. 1Q1Q1Q1QFY17 within expectations; strong contribution from banking FY17 within expectations; strong contribution from banking FY17 within expectations; strong contribution from banking FY17 within expectations; strong contribution from banking operations mitigated by insurance unitoperations mitigated by insurance unitoperations mitigated by insurance unitoperations mitigated by insurance unit.... HLB registered robust earnings growth in 1QFY17, underpinned by solid loan growth, NIM uplift (from effective funding cost management) and treasury gains. Positively, contribution from Bank of Chengdu improved due to cost discipline and decline in provisions. Liquidity continues to be a strong point for HLB, as its loan-to-deposit ratio was kept low at c.80%. NPL ratio stood stable and low at 0.8% despite the classification of one account. Insurance income was dented by lower interest rates, but is expected to recover given the surge in interest rate in 4QCY16. HL Cap’s earnings were stable. Revenues still hinge largely on HLB. Revenues still hinge largely on HLB. Revenues still hinge largely on HLB. Revenues still hinge largely on HLB. Typically, about 90% of HLFG’s revenues will come from HLB, which we remain positive on. In this current uncertain environment, balancing liquidity vs profitability will be crucial for HLB. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate remains a wildcard, but has shown improvement in the recent quarter. Valuation: We keep our BUY rating and lower TP to RM17.00 (from RM18.00) as we reinstate the historical average holding company discount to 15% (from 10%). Our TP is based on the sum-of-parts metric using our TP for HLB, while HL Cap and HLA are valued at 1x and 1.5x BV, respectively. Key Risks to Our View: Challenging operating environment. Challenging operating environment. Challenging operating environment. Challenging operating environment. Drawing new growth levers may be challenging, given the softer operating environment. Rapid interest rate movements could result in volatile contribution from its insurance operations.
At A Glance Issued Capital (m shrs) 1,145
Mkt. Cap (RMm/US$m) 16,995 / 3,820
Major Shareholders (%)
Hong Leong Co Malaysia Bhd (%) 51.9
Guoco Group Ltd (%) 25.4
Free Float (%) 22.5
3m Avg. Daily Val (US$m) 0.95
ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks
DBS Group Research . Equity
7 Dec 2016
Malaysia Company Guide
Hong Leong Financial Group Version 4 | Bloomberg: HLFG MK | Reuters: HLCB.KL Refer to important disclosures at the end of this report
89
109
129
149
169
189
209
11.3
12.3
13.3
14.3
15.3
16.3
17.3
18.3
19.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Relative IndexRM
Hong Leong Financial Group (LHS) Relative KLCI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES
Page 74
Company Guide
Hong Leong Financial Group
WHAT’S NEW
Weak insurance income offset by strong banking income
HighHighHighHighllllights ights ights ights
HLB’s earnings boosted by strong topline growth. HLB’s earnings boosted by strong topline growth. HLB’s earnings boosted by strong topline growth. HLB’s earnings boosted by strong topline growth. HLB’s
1QFY17 net profit of RM543m was within expectations. Net
profit grew strongly y-o-y, on the back of robust income
growth. Net interest income was underpinned by expansion in
NIM as yields were largely stable while cost of funds fell (from
maturity of higher cost deposits). Meanwhile, non-interest
income was boosted by treasury income. Expenses were higher
due to increase in personnel and marketing costs, but its cost-
to-income ratio was kept at 45%. Income from associate, Bank
of Chengdu, has improved – thanks to cost discipline and
decline in provisions. On a q-o-q basis, earnings were lower as
provisions normalised (as opposed to write backs in previous
quarter).
Loan growth driven by mortgage and SME; liquidity remains Loan growth driven by mortgage and SME; liquidity remains Loan growth driven by mortgage and SME; liquidity remains Loan growth driven by mortgage and SME; liquidity remains
ample. ample. ample. ample. Loan growth stood at 4% y-o-y/0.3% q-o-, largely
driven by mortgage and SME, which are in line with HLB’s
targeted segments. Deposit grew at 3% y-o-y/1% q-o-q, led
by fixed deposits. Liquidity remains healthy as the loan-to-
deposit ratio was kept low at 80%.
Stable asset qualiStable asset qualiStable asset qualiStable asset quality indicators. ty indicators. ty indicators. ty indicators. Impaired loans ratio was largely
stable at 0.84%. Exposure to oil and gas (<1% of total loans)
in addition to commodities was relatively unchanged at 3% of
total loans. Loan loss coverage remains relatively high at 113%
(excluding regulatory reserve). Higher impaired loans were
noted in the working capital segment q-o-q and this was
attributed to an oil and gas account. Little provisions were
required as the account is largely secured.
Insurance income dragged by lower interest rates; HL Cap’Insurance income dragged by lower interest rates; HL Cap’Insurance income dragged by lower interest rates; HL Cap’Insurance income dragged by lower interest rates; HL Cap’s s s s
earnings were stable.earnings were stable.earnings were stable.earnings were stable. HLA recorded a decline in pre-tax profit,
primarily driven by higher actuarial reserves as interest rates
were lower y-o-y. The underlying trend remains healthy as
gross premium growth remained robust at 7% y-o-y, while
retaining a low management expense ratio of 6% during the
quarter. HL Cap’s earnings were stable. Separately, HLFG
declared an interim DPS of 13 sen.
Outlook Outlook Outlook Outlook
Expect earnings windfall from recent jump in interest ratesExpect earnings windfall from recent jump in interest ratesExpect earnings windfall from recent jump in interest ratesExpect earnings windfall from recent jump in interest rates....
Despite the weak set of results from its insurance unit, we
keep our forecast intact, as interest rate moved up sharply in
4QCY15, which should translate to an earnings windfall in the
coming quarter.
Halted negotiations on sale of insurance unitHalted negotiations on sale of insurance unitHalted negotiations on sale of insurance unitHalted negotiations on sale of insurance unit; back to business ; back to business ; back to business ; back to business
aaaas usuals usuals usuals usual.... Bank Negara Malaysia (BNM) had given the green
light to HLFG and its wholly-owned subsidiary, HLA Holdings
Sdn Bhd (HLAH) to commence negotiations with certain parties
for a possible sale of HLAH’s equity interest in Hong Leong
Assurance Berhad (HLA) and Hong Leong MSIG Takaful Berhad
(HLMT), subject to the negotiations being concluded within six
months from 23 June 2016. However, earlier this month, it
was announced that HLFG and HLA could not reach an
acceptable commercial agreement with the negotiating parties
and have mutually agreed to cease negotiations. Although the
name of the buyer was not officially announced, it was touted
that the buyer could be Canada’s Sun Life and Khazanah. The
deal was valued by sources at RM3bn or almost equivalent to
3x BV of the life insurance assets. As negotiations have ceased,
HLFG would return to a business-as-usual mode by focusing on
its banking and insurance business.
HLB keeping a cautious stance for FY17F.HLB keeping a cautious stance for FY17F.HLB keeping a cautious stance for FY17F.HLB keeping a cautious stance for FY17F. FY17F targets were
retained, and appear to skew towards a cautious mode with
loan growth expected to at least track industry levels. It is
crucial to manage loan growth to ensure NIM trends would
not be significantly compromised. Deposits would likely grow
at the same pace, keeping its loan-to-deposit ratio at c.80%.
HLB aims to keep NIM stable by managing its liability mix, as
demonstrated in 1QFY17. Non-interest income to total income
ratio is targeted at above 25%, driven by transactions and
customer flows. Cost savings from the MSS will be reinvested
to enhance digital capabilities. Digital-banking initiatives are
expected to drive transaction banking volumes higher over
time. Cost-to-income ratio is targeted to be below 46%.
Credit costs excluding recoveries are guided to normalise at
25-35bps; there are still some recoveries that could be
expected but chunky ones are largely done. Post-rights and
with slower growth expected, ROE is targeted at 10-11%.
ValuationValuationValuationValuation
Maintain BUY with lower RM17Maintain BUY with lower RM17Maintain BUY with lower RM17Maintain BUY with lower RM17.00 TP .00 TP .00 TP .00 TP (from RM18.00) as we
reinstate the historical average holding company discount to
15% (from 10%), subsequent to the cessation of negotiations
on the sale of its insurance unit. While this negotiation is now
ceased, we would not discount the possibility of other parties
attempting to pursue such a transaction again. Other than
that, a corporate streamlining exercise remains a catalyst for
the stock. Our TP for HLFG is based on sum-of-parts valuation
that uses our target price for HLB, while HL Cap and HLA are
valued at 1x BV and 1.5x BV, respectively.
ASIAN INSIGHTS VICKERS SECURITIES
Page 75
Company Guide
Hong Leong Financial Group
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq
Net Interest Income 657 659 682 3.9 3.5
Islamic Income 115 121 130 13.2 13.2
Non-Interest Income 375 426 370 (1.6) (13.3)
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,1471,1471,1471,147 1,2071,2071,2071,207 1,1811,1811,1811,181 3.03.03.03.0 (2.1)(2.1)(2.1)(2.1)
Operating Expenses (506) (552) (538) 6.4 (2.6)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 641641641641 654654654654 643643643643 0.40.40.40.4 (1.7)(1.7)(1.7)(1.7)
Provisions (46.1) 28.0 (27.1) (41.3) (196.7)
Associates 102 107 109 6.9 2.5
Exceptionals 0.0 0.0 0.0 nm nm
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 697697697697 789789789789 726726726726 4.14.14.14.1 (8.0)(8.0)(8.0)(8.0)
Taxation (115) (188) (142) 23.3 (24.5)
Minority Interests (194) (207) (197) (1.4) (4.8)
Net ProfitNet ProfitNet ProfitNet Profit 387387387387 394394394394 386386386386 (0.3)(0.3)(0.3)(0.3) (1.9)(1.9)(1.9)(1.9)
Growth (%)
Net Interest Income Gth (0.2) 1.7 3.5
Net Profit Gth (12.2) 24.9 (1.9)
Key ratio (%)*
NIM 1.6 1.6 1.6
NPL ratio N/A N/A N/A
Loan-to deposit N/A N/A N/A
Cost-to-income 44.1 45.8 45.5
Total CAR N/A N/A N/A
*HLB’s ratios Source of all data: Company, DBS Bank HLFG: RNAV
Source of all data: Company, DBS Bank
StakeStakeStakeStake Share priceShare priceShare priceShare price No. of s haresNo. of s haresNo. of s haresNo. of s hares Va lueVa lueVa lueVa lue RNAV/s hareRNAV/s hareRNAV/s hareRNAV/s hare CommentsCommentsCommentsComments
(%)(%)(%)(%) (RM)(RM)(RM)(RM) (RMm)(RMm)(RMm)(RMm) (RM)(RM)(RM)(RM)
Hong Leong Bank 64.4% 15.00 2,167.72 20,940 18.25
Hong Leong Capital 81.3% n.a 238.97 532 0.46
Fa ir va lue of inves tment in l is ted companiesFa ir va lue of inves tment in l is ted companiesFa ir va lue of inves tment in l is ted companiesFa ir va lue of inves tment in l is ted companies (a )(a )(a )(a ) 21,47221,47221,47221,472 18.7118.7118.7118.71
HLFG's key unlis ted as s etsHLFG's key unlis ted as s etsHLFG's key unlis ted as s etsHLFG's key unlis ted as s ets As s etsAs s etsAs s etsAs s ets L iabi li tiesL iabi li tiesL iabi li tiesL iabi li ties Net As s etsNet As s etsNet As s etsNet As s ets Va lueVa lueVa lueVa lue
(RMm)(RMm)(RMm)(RMm) (RMm)(RMm)(RMm)(RMm) (RMm)(RMm)(RMm)(RMm) (RMm)(RMm)(RMm)(RMm)
Ins urance - HLA Holdings (100%)Ins urance - HLA Holdings (100%)Ins urance - HLA Holdings (100%)Ins urance - HLA Holdings (100%)
Hong Leong Assurance Berhad 70% 13,293 11,965 1,328 1,395 1.22
Hong Leong-MSIG Takaful 65% 445 357 88 86 0.07
MSIG Insurance 30% 30% stake in MSIG Insurance is equity accounted
Net as s ets of core divis ions bas ed on BVNet as s ets of core divis ions bas ed on BVNet as s ets of core divis ions bas ed on BVNet as s ets of core divis ions bas ed on BV (b)(b)(b)(b) 1,4811,4811,4811,481 1.291.291.291.29
RNAVRNAVRNAVRNAV (a )+(b)(a )+(b)(a )+(b)(a )+(b) 22,95222,95222,95222,952 20.0020.0020.0020.00
HLFG's no. of shares 1,147.52
Holding Company discount 15%
Fair Va lueFa ir Va lueFa ir Va lueFa ir Va lue 17.0017.0017.0017.00
HLA Holdings is a holding company that houses all of the
group's insurance businesses
Based on our TP for HLB (valued at 1.5x CY16 BV)
Based on 1x BV of HLCap; share price is irrelevant
HLA Holdings owns 70%; MSIG owns 30%; Assumed 1.5x BV
HLA Holdings owns 65%; MSIG owns 35%; Assumed 1.5x BV
ASIAN INSIGHTS VICKERS SECURITIES
Page 76
Company Guide
Hong Leong Financial Group
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
HLFG’s growth prospects hinge largely on HLB.HLFG’s growth prospects hinge largely on HLB.HLFG’s growth prospects hinge largely on HLB.HLFG’s growth prospects hinge largely on HLB. HLB’s loan
growth is driven by mortgage and SME loans. We are assuming
6% loan growth in our forecasts, while deposit should track
loan growth. With a loan-to-deposit ratio still among the lowest
in the industry, HLB would have room to further leverage its
asset-liability mix to accelerate loan growth and optimise NIM.
We expect its loan-to-deposit ratio to hover around 80%.
Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver. Recurring fee income
(loan-related and credit card fees) remains HLB’s key non-
interest income driver. However, it is also building up income
from wealth management. HLB has established a regional
wealth management and private banking platform in Singapore.
Wealth management is expected to be HLB’s new growth driver
as it gradually gains prominence.
Hong Leong Assurance (HLA) an overlooked jewel.Hong Leong Assurance (HLA) an overlooked jewel.Hong Leong Assurance (HLA) an overlooked jewel.Hong Leong Assurance (HLA) an overlooked jewel. HLA, HLFG’s
insurance arm, recorded lower contribution to group PBT, at
5% in FY16 after a rough year of being hit by unfavourable
interest rate movements and provisions for equity impairment.
Going forward, there should be a pick-up in contribution as the
Group focuses on shifting its profitability levers to non-par and
investment-linked policies. In early July 2016, HLFG obtained
BNM’s approval to commence negotiations with certain parties
for the disposal of its life insurance business. However, in early
November, it was announced that HLFG and HLA could not
reach an acceptable commercial agreement with the
negotiating parties and have mutually agreed to cease
negotiations. HLA ranks 4th among Malaysian insurers with
11% market share.
HL Cap on a better footing.HL Cap on a better footing.HL Cap on a better footing.HL Cap on a better footing. Upon establishing a full-fledged
and experienced investment banking team in early 2010 and
completing the merger of Hong Leong Investment Bank (HLIB)
and MIMB Investment Bank in Sep 2012, HLIB has since
strengthened its presence in the investment banking industry.
HL Cap has seen its pretax profit increase almost four-fold since
2010, and has gradually strengthened its market share in equity
and debt issues, as well as in stockbroking. However,
contribution to HLFG remains small. We value HLCap at 1x BV
in our SOP valuation.
Margin Trends
Gross Loan & Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.3%
1.4%
1.4%
1.5%
1.5%
1.6%
1.6%
0
500
1,000
1,500
2,000
2,500
3,000
2015A 2016A 2017F 2018F 2019F
RM m
Net Interest Income Net Interest Income Margin
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2015A 2016A 2017F 2018F 2019F
RM m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2015A 2016A 2017F 2018F 2019F
RM m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
72%
74%
76%
78%
80%
82%
84%
86%
88%
101,803
121,803
141,803
161,803
181,803
201,803
2015A 2016A 2017F 2018F 2019F
RM bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
42.5%
43.0%
43.5%
44.0%
44.5%
45.0%
45.5%
46.0%
46.5%
47.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
2015A 2016A 2017F 2018F 2019F
Net Interest Income Non-interest Income
Islamic Banking Income Cost-to-income Ratio
ASIAN INSIGHTS VICKERS SECURITIES
Page 77
Company Guide
Hong Leong Financial Group
Balance Sheet:
Superior asset quality. Superior asset quality. Superior asset quality. Superior asset quality. At <1%, HLB’s NPL ratio is second only to
Public Bank (PBK). Similar to PBK, HLB also boasts a prudent
credit culture. We expect HLB to continue recording resilient
asset-quality indicators. Normalised credit cost is expected to
hover around 25bps, excluding recoveries.
Stronger capital ratios postStronger capital ratios postStronger capital ratios postStronger capital ratios post----rights. rights. rights. rights. HLFG completed its RM1.1bn
rights issue in Dec 2015 which boosted capital ratios. As a
Financial Holding Company, HLFG is expected to meet Basel III
capital requirements by 2019.
Streamlining corporate structure could enhance efficiency.Streamlining corporate structure could enhance efficiency.Streamlining corporate structure could enhance efficiency.Streamlining corporate structure could enhance efficiency. We
believe it is inefficient to have so many listed entities in the
group, especially if the counters have low trading liquidity.
Ideally, the corporate structure should be collapsed to improve
efficiency. But there are other hurdles that need to be
considered including the ultimate financial holding company for
the group and possible issues surrounding the grandfathering
rule on its ownership of HLB.
Share Price Drivers:
Corporate streamlining could reCorporate streamlining could reCorporate streamlining could reCorporate streamlining could re----rate HLFG’s share pricerate HLFG’s share pricerate HLFG’s share pricerate HLFG’s share price. Our
investment thesis is built on the potential corporate
restructuring within the group. There is also potential to unlock
value in HLA if the insurance unit is carved out for listing or
disposed of.
Key Risks:
Change in business strategy.Change in business strategy.Change in business strategy.Change in business strategy. A significant change to HLB’s
business strategy could derail HLFG’s earnings given that it
remains the key earnings driver for HLFG. Inability to
continuously scale up HLA’s business could limit earnings
upside, assuming it is not disposed of.
Company Background
Hong Leong Financial Group Berhad is the parent company of
Hong Leong Bank. Its operations extend beyond commercial
banking operations. Through its subsidiaries, HLFG underwrites
life and general insurance, and provides fund management,
corporate advisory and stockbroking services.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
2015A 2016A 2017F 2018F 2019F
NPL Ratio Provision Charge-Off Rate
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
2015A 2016A 2017F 2018F 2019F
Tier-1 CAR Total CAR
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2015A 2016A 2017F 2018F 2019F
Avg: 10.4x
+1sd: 11.4x
+2sd: 12.4x
-1sd: 9.3x
-2sd: 8.3x
7.3
8.3
9.3
10.3
11.3
12.3
13.3
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 1.34x
+1sd: 1.53x
+2sd: 1.71x
-1sd: 1.16x
-2sd: 0.98x
0.8
1.0
1.2
1.4
1.6
1.8
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
(x)
ASIAN INSIGHTS VICKERS SECURITIES
Page 78
Company Guide
Hong Leong Financial Group
Key Assumptions
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Gross Loans Growth 8.7 6.3 6.0 6.0 8.0
Customer Deposits Growth 7.9 6.1 6.0 6.0 8.0
Yld. On Earnings Assets 3.4 3.4 3.4 3.3 3.3
Avg Cost Of Funds 2.2 2.3 2.2 2.2 2.2
Income Statement (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Net Interest Income 2,710 2,641 3,006 3,164 3,362
Islamic Income 420 467 514 555 600
Non-Interest Income 1,361 1,435 1,676 1,845 2,031
Operating IncomeOperating IncomeOperating IncomeOperating Income 4,4914,4914,4914,491 4,5434,5434,5434,543 5,1975,1975,1975,197 5,5645,5645,5645,564 5,9935,9935,9935,993
Operating Expenses (2,045) (2,112) (2,399) (2,519) (2,644)
PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,4462,4462,4462,446 2,4312,4312,4312,431 2,7982,7982,7982,798 3,0463,0463,0463,046 3,3483,3483,3483,348
Provisions 55.3 (96.0) (114) (158) (207)
Associates 477 402 423 468 519
Exceptionals 45.0 (172) 0.0 0.0 0.0
PrePrePrePre----tax Profittax Profittax Profittax Profit 3,0233,0233,0233,023 2,5652,5652,5652,565 3,1083,1083,1083,108 3,3563,3563,3563,356 3,6613,6613,6613,661
Taxation (563) (501) (622) (671) (732)
Minority Interests (840) (705) (849) (917) (1,000)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net ProfitNet ProfitNet ProfitNet Profit 1,6211,6211,6211,621 1,3591,3591,3591,359 1,6371,6371,6371,637 1,7681,7681,7681,768 1,9291,9291,9291,929
Net Profit bef Except 1,576 1,531 1,637 1,768 1,929
Growth (%)
Net Interest Income Gth 9.5 (2.5) 13.8 5.2 6.3
Net Profit Gth (5.0) (16.2) 20.5 8.0 9.1
Margins, Costs & Efficiency (%)
Spread 1.2 1.1 1.2 1.2 1.1
Net Interest Margin 1.5 1.4 1.5 1.5 1.5
Cost-to-Income Ratio 45.5 46.5 46.2 45.3 44.1
Business Mix (%)
Net Int. Inc / Opg Inc. 60.3 58.1 57.8 56.9 56.1
Non-Int. Inc / Opg inc. 30.3 31.6 32.3 33.2 33.9
Fee Inc / Opg Income 14.9 14.7 15.1 15.5 15.8
Oth Non-Int Inc/Opg Inc 15.4 16.9 17.2 17.7 18.1
Profitability (%)
ROAE Pre Ex. 12.8 10.8 10.4 10.6 10.9
ROAE 13.2 9.6 10.4 10.6 10.9
ROA Pre Ex. 1.2 1.1 1.1 1.2 1.2
ROA 1.3 1.0 1.1 1.2 1.2
Source: Company, DBS Bank
Provisions at HLB to normalise over time
ASIAN INSIGHTS VICKERS SECURITIES
Page 79
Company Guide
Hong Leong Financial Group
Quarterly / Interim Income Statement (RMm)
FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017
Net Interest Income 657 678 648 659 682
Islamic Income 115 118 114 121 130
Non-Interest Income 375 370 263 426 370
Operating IncomeOperating IncomeOperating IncomeOperating Income 1,1471,1471,1471,147 1,1651,1651,1651,165 1,0251,0251,0251,025 1,2071,2071,2071,207 1,1811,1811,1811,181
Operating Expenses (506) (711) (515) (552) (538)
PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 641641641641 454454454454 510510510510 654654654654 643643643643
Provisions (46.1) (50.8) (27.1) 28.0 (27.1)
Associates 102 84.6 109 107 109
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax ProfitPretax ProfitPretax ProfitPretax Profit 697697697697 487487487487 592592592592 789789789789 726726726726
Taxation (115) (91.0) (107) (188) (142)
Minority Interests (194) (133) (170) (207) (197)
Net ProfitNet ProfitNet ProfitNet Profit 387387387387 263263263263 315315315315 394394394394 386386386386
Growth (%)
Net Interest Income Gth (0.2) 3.2 (4.4) 1.7 3.5
Net Profit Gth (12.2) (32.0) 19.6 24.9 (1.9)
Balance Sheet (RMm)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Cash/Bank Balance 8,463 9,430 11,107 9,491 7,890
Government Securities 3,532 4,329 4,582 4,851 5,226
Inter Bank Assets 4,325 3,034 3,185 3,345 3,512
Total Net Loans & Advs. 113,114 120,446 127,499 134,995 145,712
Investment 61,967 61,260 65,275 72,213 80,198
Associates 3,870 4,127 4,402 4,695 5,008
Fixed Assets 1,150 1,849 1,942 2,039 2,141
Goodwill 2,748 2,696 2,696 2,696 2,696
Other Assets 3,273 3,306 3,470 3,642 3,823
Total AssetsTotal AssetsTotal AssetsTotal Assets 202,443202,443202,443202,443 210,475210,475210,475210,475 224,157224,157224,157224,157 237,967237,967237,967237,967 256,204256,204256,204256,204
Customer Deposits 140,955 149,491 158,460 167,968 181,405
Inter Bank Deposits 8,944 8,106 8,511 8,937 9,384
Debts/Borrowings 10,199 6,672 6,770 6,871 6,975
Others 13,421 12,400 12,903 13,429 13,980
Minorities 6,353 7,836 9,441 10,194 11,121
Shareholders' Funds 13,111 15,341 16,127 17,143 18,252
Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 202,441202,441202,441202,441 210,475210,475210,475210,475 224,157224,157224,157224,157 237,967237,967237,967237,967 256,204256,204256,204256,204
Source: Company, DBS Bank
Strong contribution from banking operations offset weak insurance contribution
ASIAN INSIGHTS VICKERS SECURITIES
Page 80
Company Guide
Hong Leong Financial Group
Financial Stability Measures (%)
FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF
Balance Sheet Structure
Loan-to-Deposit Ratio 80.2 80.6 80.5 80.4 80.3
Net Loans / Total Assets 55.9 57.2 56.9 56.7 56.9
Investment / Total Assets 30.6 29.1 29.1 30.3 31.3
Cust . Dep./Int. Bear. Liab. 88.0 91.0 91.2 91.4 91.7
Interbank Dep / Int. Bear. 5.6 4.9 4.9 4.9 4.7
Asset Quality
NPL / Total Gross Loans 0.8 0.8 0.8 0.8 0.7
NPL / Total Assets 0.5 0.5 0.5 0.5 0.4
Loan Loss Reserve Coverage 136.3 119.8 135.8 150.0 179.5
Provision Charge-Off Rate 0.0 0.1 0.1 0.1 0.1
Capital Strength
Total CAR 14.4 14.8 14.6 14.8 14.6
Tier-1 CAR 12.0 13.2 12.9 13.0 12.8
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Sue Lin LIM
Lynette CHENG
S.No.S.No.S.No.S.No.Date of Date of Date of Date of
ReportReportReportReport
Closing Closing Closing Closing
PricePricePricePrice
12-mth 12-mth 12-mth 12-mth
Target Target Target Target
PricePricePricePrice
Rat ing Rat ing Rat ing Rat ing
1: 10 Dec 15 13.72 16.80 BUY
2: 22 Jan 16 13.22 16.80 BUY
3: 02 Feb 16 13.96 16.80 BUY
4: 24 Feb 16 14.00 16.70 BUY
5: 01 Mar 16 14.10 16.70 BUY
6: 24 Mar 16 14.96 16.70 BUY
7: 03 May 16 15.10 16.70 BUY
8: 25 May 16 15.00 16.60 BUY
9: 02 Jun 16 14.70 16.60 BUY
10: 01 Jul 16 15.00 16.60 BUY
11: 12 Jul 16 15.00 16.60 BUY
12: 14 Jul 16 15.10 16.60 BUY
13: 01 Aug 16 15.08 16.60 BUY
14: 30 Aug 16 16.08 18.00 BUY
Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 05 Sep 16 15.84 18.00 BUY
16: 23 Nov 16 15.10 17.00 BUY
12 3
4
5
6
7
8
9
10
11
12
13
14
15 16
12.08
12.58
13.08
13.58
14.08
14.58
15.08
15.58
16.08
16.58
Dec-15 Apr-16 Aug-16 Dec-16
RMRMRMRM
Low loan-to-deposit ratio at HLB
Industry Focus
Malaysian Banks
Page 81
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 7 Dec 2016 07:05:55 (MYT) Dissemination Date: 7 Dec 2016 08:16:51 (MYT)
GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by This report is prepared by This report is prepared by This report is prepared by DBS Bank LtdDBS Bank LtdDBS Bank LtdDBS Bank Ltd. . . . This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,
its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated
in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard
to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of
addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal
or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of
profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This
document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or
persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no
obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction
in the past twelve months and does not engage in market-making.
Industry Focus
Malaysian Banks
Page 82
ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. As of 7 Dec 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold
interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)
responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and
procedures are in place to ensure that confidential information held by either the research or investment banking function is handled
appropriately.
COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary
position in the securities recommended in this report as of 31 Oct 2016.
Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services:
2. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:
3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
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AustraliaAustraliaAustraliaAustralia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong KongHong KongHong KongHong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
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MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Industry Focus
Malaysian Banks
Page 83
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