Highlights

We attended an analyst briefing / conference call yesterday for the company’s FY03/13 final results which was released on Tuesday.

We take comfort that management is very focus in executing its strategy by latching on to its niche in the consumer and SME segments. It also stressed the important of maintaining its strong deposit franchise, which was one of the main reasons we like about the company.

With an entrenched deposit franchise and LD of less than 80%, it is in excellent position to sustain the 12.8% yoy loans grown registered in FY13. Note that HLIB is more conservative and has an assumption of 10% growth for FY14. Better utilisation of its LD would also help to support NIM.

On NIM, management is confident of maintaining, if not better, its margin given the flexibility to ramp up loans growth (with new products). The improved mix between consumer and commercial also helps. Note that its loans expansion has gained traction as the yoy growth is now ahead of industry average for four consecutive quarters.

Although CIR of 47.9% is at the upper range of its longer term target of 45-48%, it has room to improve the productivity and efficiency of its staff force.

The focus on transactional banking is expected to gradually improve its non-interest income ratio and helps to engage, retain and cross sell customers.

Credit charge is expected to be 15-20bps as recovery is expected to taper off.

Risks

• Unexpected jump in impaired loans and lower than expected loan growth. Intense competition from much bigger players.

Forecasts

• No changes.

Rating

HOLD

• Positives – strong asset quality and deposit franchise (the latter helps in protecting NIM), strong niche in consumer and SME, potential M&A excitement and ample room for more active capital management. Transformation has resulted in strong loans growth (which used to be lagging is now ahead of industry average).
• Stiff competition from significantly larger players with bigger scale and reach as well as relatively lower liquidity against peers.

Valuation

• Target price maintained at RM4.91 based on Gordon Growth with ROE of 13.4% and WACC of 10.1%. While we remained positive about its prospects, we believe it has been fully reflected in the share price. Thus, we are keeping our HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 23 May 2013