Results

3QFY13 net profit of RM1,047.3m (+2.3% qoq; +7.7% yoy) took 9MFY13 to RM3,039.1m (+6.8% yoy), below expectations or accounted for 72% and 73% of HLIB and consensus full year forecast, respectively.

Deviations

Mainly due to higher than expected provision in 3Q as a result of uptick in impaired loans ratio.

Dividends

None.

Highlights

Loans growth of 11.8% yoy (domestic 11.9%), in line with guidance of 11-12% (12-13%).

Positives from 3QFY13 results are stable NIM (over the last three quarters) while yoy erosion was within guidance of 10- 12bps as well as well contained overheads (3QFY13 enjoyed widened JAW). NIM erosion in subsequent years to lessen as the rundown of older loans is near tail-end.

The above was partly offset by lower non-interest income (mainly forex profit but partly offset by continued expansion in contributions from Public Mutual as NAV continued to grow) and largely due to higher provision.

Asset quality deteriorated in 3QFY13 (from HP and mortgage purposes). It has already detected some stress points in certain segments of HP since 3QFY12 and has since tightened approvals. While the current deterioration is likely from loans granted 2-3 years earlier, we believe the tightening since last year should contain further deterioration over the longer term (albeit still some stress in the shortterm). As for the mortgage purpose, the increase was due to more stringent classification with no actual deterioration.

Thus, the higher provision in 3QFY13 was largely due to the HP purpose while more stringent classification of mortgage impaired loans had little impact on provision.

While we raised our credit charge assumption, we are confident that its asset quality will remain under control and well ahead of peers.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and higher than expected erosion in NIM.

Forecasts

FY13-15 cut by 2.4-3.2% to reflect the higher provision.

Rating

HOLD

Positives:

• Above industry asset quality and ROE;
• Excellent track record in delivering guidance and consistency in growth.

Negatives:

• Dividend payout lower than previous years and uncertainty about quantum of counter cyclical buffer.

Valuation

Despite lowered forecasts, we have updated its Beta and terminal growth assumption, resulting in higher target price of RM17.93 (vs. RM16.74 previously) based on Gordon Growth (ROE of 21.3% and WACC of 8.9%).

Source: Hong Leong Investment Bank Research- 23 Oct 2013