Results

1QFY14 net profit (excluding RM30m one-off sign-on fee from bancassurance tie-up with Manulife and RM24.8m oneoff rationalization cost for VSS) of RM133.9m (-3.5% qoq; +7.5% yoy) accounted for 24.2% and 23.3% of HLIB and consensus forecasts respectively or in line with both.

Deviations

Largely in line.

Dividend

None. Already declared (ex on 25 Jul and payment on 16 Aug) first interim single-tier dividend of 7.5 sen (vs. 6.6 sen).

Highlights

Loans growth continued to be strong at double-digit yoy, as guided by management (driven by purchase of securities, HP, mortgages, non-residential loans and SME), and ahead of industry average for five consecutive quarters. While SME was slow in 1QFY14, pipeline in recent months has shown an increase to higher level vs. last six months. Mortgage demand remained strong while it is also targeting more focus on higher margin products/segments.

Although CASA (now 35.8% of total vs. 33.6% in 4QFY13) growth was stronger vis-à-vis overall deposits NIM still suffered during the quarter due to higher FD rates as well as change in loan mix as percentage of higher margin cooperative loans and older mortgage loans is declining.

The VSS was completed in Jun, resulting in the one-off retionalization cost. Management guided for breakeven of 18 months which implies savings of circa RM16.5m per annum going forward or 3% of earnings.

Credit charge guidance intact at 15bps.

Asset quality continued to improve (with no signs of deterioration) while capital ratios also remained strong (among the highest vs. peers as well as purely equity).

Risks

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

Forecasts

Unchanged.

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 but is now ahead of industry average).

Negatives – 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%.

Source: Hong Leong Investment Bank Research - 7 Aug 2013