Results

1QFY13 net profit of RM150.8m (-6.0% qoq; -9.1% yoy) was 24.8% of HLIB and 24.4% of consensus forecasts, respectively.

Deviations

Largely in line.

Highlights

Despite continued loans growth, pace has slowed and fallen behind industry average. Coupled with lower Islamic income and NIM, net interest income was lower qoq while overheads continued to expand sequentially. Coupled with lower provision write-back, the combined effect was more than sufficient to offset the higher qoq non-interest income.

Deposits contracted by 0.3% qoq (vs. industry average of +2.6%) mainly from fixed and demand deposits as well as others. Meanwhile, 5.8% yoy growth was lowest since 1Q99 and behind industry average of 8.4% yoy. As a result, although CASA strongly at 16.8% yoy, it contracted by 2% qoq. Consequently, CASA is now 20.7% of total, slightly lower than the all-time-high of 21.1% in 4QFY12.

Overall asset quality improved (although there were some deterioration in construction, transport and other purposes, we believe they were due to the festive seasonality) while capital ratios remained robust.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and intense competition from larger peers.

Forecasts

Unchanged.

Rating

SELL

• Positives
  • Improving asset quality, profitability and Tier-1 capital purely equity;
  • Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM50bn (less than half of the next largest bank, AMMB).
• Negatives:
  • Investors’ perception and its delinquency track record.
  • One of the lowest NIM among peers, lowest ROE in industry, low deposit franchise (CASA only 21% of total) and one of the highest percentage of fixed rate loans.

Valuation

• Target price maintained at RM3.81 based on Gordon Growth with ROE at 9.7 and WACC at 10.8%. Despite potential of M&A excitement and low valuations, we believe it has ran ahead of fundamentals given that ROE adjusted P/B valuation is already close to peers. Thus, given that total potential return is more than -10%, we are downgrading our rating on the stocks to SELL.

Source: Hong Leong Investment Bank Research - 21 May 2013