Results

2QFY13 net profit of RM410.3m (+14.9% qoq; -9.6% yoy) took 1HFY13 to RM767.5m (-13.7% yoy), below expectations or only accounted for 38.9% and 42.5% of HLIB and consensus forecasts, respectively.

Deviation

Provision of RM135m (RM76m in 1Q and RM60in 2Q) for a manufacturing related company (the well publicized Malaysian AE Model) and one-off RM58m bad debts writeoff (recalibration of Effective Interest Rate whereby PD and LGD model suggest additional charge off).

Dividends

Single-tier interim dividend of 6 sen (vs. 6 sen), all under the dividend reinvestment plan (DRP).

Highlights

Besides the provision and elevated overheads (post merger with OSK), other underlying trends were intact as preprovision earnings growth was underpinned by loans growth (ahead of industry), stable sequential NIM (albeit still lower yoy in 1H) and non-interest income ratio at all-time-high. Management guided that it will take 6-9 months to bring down CIR to the desired level.

Asset quality worsened due to one steel-related account (classified as impaired but no provision needed). Otherwise, it would have improved and there is no stress on overall portfolio. Thus, credit charge guidance of 35-40bps (vs. 52bps in 1H) intact in view of several potential recoveries.

Capital ratio remained robust. Group CET1 is 8.8%.

Some delay in equity capital market deals but unlikely in debt capital market.

Merger revenue synergy ahead of target while still working on cost synergy (funding and branch rationalization).

Acquisition of Mestika is ready for resubmission soon with no intention to change any terms and remained interested (due to longer term growth potential) despite recent rout in asset prices in Indonesia.

Risks

Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

FY13 forecast cut by 7.5% to reflect the additional provision in 1H while FY14-15 cut by circa 3% to reflect more conservative assumptions.

Rating

BUY

Positives - Valuations still lagging behind especially after recent selloff; transformation bearing fruits, reflected in strong loan growth and improving asset quality; “Easy” contributing to higher market share in retail segment; and tie-up with Pos M’sia.

Negatives - Lack of liquidity, short term dilution from acquisition of OSK and sentiment towards lumpy provision.

Valuation

Target price reduced to RM9.21 vs. RM10.08 based on Gordon Growth with ROE of 11.8% and WACC of 10.3%.

Source: Hong Leong Investment Bank Research - 2 Sep 2013