Highlights

During the meeting, management maintained that its KPI of 16% ROE is still achievable but this would include the EI from 1Q (consist of RM515.1m profit from sale of 51% stake in CIMB Aviva and RM200m of restructuring charges).

While it did not guide for core ROE, we believe that core ROE is unlikely to meet its KPI partly due to the higher capital base (arising from DRP and profit from sale of Aviva) as well as less sanguine outlook.

On the more somber side: 1) Indonesia’s hike in interest rate and tight control on forex will put pressure on NIM (despite Niaga’s qoq NIM improvement in 2Q, 3Q will be under pressure) and loans growth as well as loss of income from clients forex business; 2) the expected pick up in activities post the 13th General Election was weaker than anticipated and the company now expect more meaningful recovery only after the UMNO general assembly; 3) earlier guidance of break-even for RBS in FY13 may not be achievable with FY14 a more viable and reasonable time line. The combined impact of items 1 and 2 is lower credit growth of low-teens vs. mid-teens (as earlier guided).

However, on the more positive side: 1) NIM in Malaysia, Singapore and Thailand are expected to be stable or improve slightly; 2) its trading book has zero duration i.e. no P&L impact from MTM as the portfolio is hedge against interest rate risk, unless credit risk spread widens; 3) capital market income is affected but make up by the strong corporate lending income; 4) credit cost guidance intact with no signs of impaired loans creeping up; 5) restructuring of its retail and regional platform progressing well with some initial positive trends. Although there is room for the regional platform to improve, initial results are positive (on corporate lending, cash / wealth management and etc.); and 6) forex spread has seen some improvement in Jun and Jul.

Catalysts

Gaining more traction in cost rationalization, better than expected non-interest income growth, turning into an APAC universal bank and more active capital management.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

Overall, while there are still positive trends, we prefer to be conservative given the less sanguine outlook on certain segments/expectations. Thus, FY13-15 forecasts cut by circa 4%.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform.

Negatives - Non-interest income may fall short if capital markets soften, impact from higher Indonesia interest rate.

Valuation

Target price cut to RM8.06 (from RM8.42) based on Gordon Growth with ROE of 15.1% and WACC of 10.9%.

Source: Hong Leong Investment Bank Research - 31 Jul 2013