Results

1QFY13 net profit of RM968.3m (-2.4% qoq; +4.1% yoy) accounted for 22.9% and 23.1% of HLIB and consensus full year forecast, respectively or below expectations.

Deviations

Higher than expected overheads and seasonally weaker quarter due to festive holidays.

Dividends

None, normally declare dividend during 2Q and 4Q results.

Highlights

Loans growth of 11.9% yoy (domestic 12.5%), slightly ahead guidance of 11-12%. Hong Kong operating environment continued to be very tough as loans growth was flattish. However, this was partly offset by continued erosion in NIM (due to competitive forces as well as change in loan mix between older loans with higher rate and newer loans with lower rate).

Non-interest income flattish qoq mainly due to lower forex income which offset higher fee and dividend income. We believe the shorter working days in the quarter also weighed down on the contributions.

Overheads were higher mainly from personnel costs. Besides the normal continued investment in human capital, adoption of MFRS139 on employee benefits has resulted in pension costs now elevated to higher level as actuarial gains and losses are recognized immediately instead of over a period of time.

Provisions were stable while impaired loans (IL) ratio improved slightly by 1bps although there was increase in IL absolute amount and formation. We believe the latter was due to the festive holidays.

Although its CET1 (under Basel III) of 8.2% is comfortably above the requirement of 7% by 2019, uncertainty is the counter cyclical buffer (CCB) to be phased in over four years from 2016. If total CET1 (including CCB) is 9-10%, may undertake cash call(s) but unlikely to exceed 10% of market capitalization. However, it will reduce ROE to circa 20%.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and higher than expected erosion in NIM.

Forecasts

Unchanged for now to account for the seasonally weaker 1Q.

Rating

HOLD

• Positives:
  • Above industry asset quality and ROE;
  • Excellent track record in delivering guidance and consistency in growth.
• Negatives:
  • Dividend payout lower than previous years and uncertainty about quantum of counter cyclical buffer.

Valuation

• Target price maintained at RM15.47 based on Gordon Growth (ROE of 22.5% and WACC of 9.6%).

Source: Hong Leong Investment Bank Research - 24 Apr 2013