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. KLCI KLCI KLCI KLCI : : : : 1,629.73 1,629.73 1,629.73 1,629.73 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 CIMB HLB MAY PBK RHBBANK 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 Cap Mkt Cap Mkt Cap Mkt Cap Target Price Target Price Target Price Target Price Performance (%) Performance (%) Performance (%) Performance (%) RM RM RM RM US$m US$m US$m US$m RM RM RM RM 3 mth 3 mth 3 mth 3 mth 12 mth 12 mth 12 mth 12 mth Rating Rating Rating Rating 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
83
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Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue
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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.
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
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,
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)
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
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
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
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
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
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 (%)(%)(%)(%)
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
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
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.
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 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
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
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
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
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,
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
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
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.
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
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
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
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
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.
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
Page 36
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
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
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
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%
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-
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
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
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,
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)
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,
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
Page 58
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
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
Page 60
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
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
ASIAN INSIGHTS VICKERS SECURITIES
Page 61
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-
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;
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
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.
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
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
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
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
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
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
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
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
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
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,
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.
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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GeneralGeneralGeneralGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
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
SSSSingaporeingaporeingaporeingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, 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 DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
DubaiDubaiDubaiDubai
This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3
rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),
Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United StatesUnited StatesUnited StatesUnited States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
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DBS Bank LtdDBS Bank LtdDBS Bank LtdDBS Bank Ltd
12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888