- Beat ours and consensus’ expectations. We expected bigger than the -1.4%yoy decline in net profit
- Strong PPOP moderated impact of higher provisions. Most of the provisions coming in 1HFY16 and the tide maybe turning with expected lower provisions in FY17
- Asset quality was mixed but there were some signs of improvement even if there were an uptick in GIL ratio
- Robust loans and deposit growth. Strong growth in CASA franchise while “pure” fixed deposit dropped
- Conservative guidance from management for FY17
- Final dividend of 32 sen with 10 sen cash portion. Total dividend of 52 sen
- We revised upwards our FY17 forecast by +1.4%
- Upgrade to BUY on prospect of earnings recovery with revised TP to RM9.40 based on PB multiple of 1.4x
Strong PPOP growth... PPOP grew +6.7%yoy to RM11.69b due to robust income growth especially in 4QFY16 where NIM improved +3bps yoy to 2.32% from better yield and containment of fixed deposit growth, coupled with contained OPEX. In fact, OPEX fell in 4QFY16 by -5.1%yoy, resulting in CI ratio to improve to 47.3% from 48.2% in FY15. Net income grew +4.8%yoy as NII rose +5.2%yoy on the back of +10.9%yoy growth to RM9.999b in Group Community Financial Services (CFS). Meanwhile NOII expanded +4.0%yoy from higher trading and investment, and net earned insurance premiums.
...moderated impact of higher provisions. The strong PPOP growth moderated the higher provisions which grew +49.8%yoy to RM3.02b. However, bulk of the provisions came in 1HFY16 with 68.3% of total full year provisions. As we have previously stated, the high provisions was due to proactive restructuring and rescheduling (R&R) of its loans portfolio. Nevertheless, we note that recoveries also grew, by +10.6%yoy to RM598.6m and mostly came in 4QFY16. This suggests that tide may begin to turn. Indeed, management is guiding net charge off rate of lower than 50bps for FY17, which is lower than the 62bps posted in FY16.
Mixed asset quality but continued to be proactive in managing it. GIL ratio in Malaysia appears to be on a downtrend posting 2nd consecutive quarters of improvement coming in at 2.06% from 2.14% and 2.23% in 3QFY16 and 2QFY16 respectively. Asset quality improved in consumer segment as mortgage, auto finance and credit card was better on a sequential quarter basis. Similarly with retail SME and corporate banking. For Singapore and Indonesia, there was an uptick in GIL ratio by 32bps qoq and 30bps qoq to 1.3% and 4.36% respectively. GIL ratio increase in Singapore was due to business segments in line with weaker operating environment. In Indonesia, the uptick was in mortgage and business banking but there were sequential quarter improvements in auto finance (from 0.95% to 0.76%), credit card (from 2.41% to 2.35%), retail SME (from 1.74% to 1.57%) and corporate banking (from 14.20% to 10.51%). Management indicated that proactive monitoring and management of its asset quality will be a key focus in FY17.
Gross loans growth rebounded. The Group registered gross loan growth of +5.7%yoy to RM485.7b as at 4QFY16 vs. decline of -0.7%yoy in the previous quarter. Gross loans in Malaysia grew +6.3%yoy to RM272.0b supported by +6.1%yoy growth to RM194.4 b in CFS segment and +7.5%yoy to RM78.8b in Global Banking segment. Gross loans also grew in other home markets. Gross loans in Singapore and Indonesia rose by +4.5%yoy and +8.7%yoy respectively on the back of higher gross loans in CFS and Global Banking in both markets.
Robust deposit growth that was with quality. Gross deposits grew +5.2%yoy to RM521.4b (inclusive of investment accounts), again supported by growth in all its home markets. Malaysia, Singapore and Indonesia posted deposit growth of +3.1%yoy, +4.4%yoy and +2.9%yoy respectively. Moreover, we like the fact that growth came from quality deposits, i.e. CASA. Group CASA grew +11.4%yoy to RM186.1b, coming from all home markets. As a result, CASA ratio improved to 35.7% from 33.7% as at 4QFY15. Concurrently, fixed deposit growth (inclusive of investment accounts) was contained whereby it grew +1.8%yoy to RM323.2b. For "pure" fixed deposit, it actually declined -2.8%yoy to RM291.6b. We believe that this will ease any pressure in NIM.
Conservative guidance from management for FY17. For FY16, the Group met its KPIs. As for FY17, we believe that the management is being conservative in its guidance. The management is guiding ROE of 10-12%, loans growth 6-7%, deposits growth 6-7%, CI ration below 50%, NIM compression of 5-10bps and net charge off rate of 50bps or below. With the expected rebound in the economic growth of its home markets, we believe that there is potential for upside surprise in FY17.
FORECAST
We revised upwards our net profit forecasts for FY17 by +1.4% to take into account the uplift in income, gross loans and deposits.
VALUATION AND RECOMMENDATION
Upgrade to BUY. We were pleasantly surprised by the Group’s strong performance in 4QFY16 especially on its income growth and OPEX containment. We are sanguine on the Group’s prospect in FY17 given that provisions is expected to come down as evident by the lower net credit charge off rate guidance and potential to maintain the momentum of loans growth and quality deposits growth. As such, we believe that we may see earnings recover in FY17. The only potential headwind will be its asset quality but the management is proactively monitoring the situation and we do not foresee any undue stress from external factor. We believe that investors should take advantage of the expected recovery in earnings. Therefore we are upgrading our call to BUY with a revised TP of RM9.40 (from RM8.10) as we peg the PB multiple to 1.4x which is 1 standard deviation below its 5-year historical average. In addition, its dividend yield of 6.5% should limit any potential downside.
Source: MIDF Research - 24 Feb 2017
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