Results

3QFY13 net profit of RM1,746.3m (+11.4% qoq; +16.3% yoy) took 9MFY13 to RM4,820.3m (+12.5% yoy), in line or accounted for 76.9% and 76% of HLIB and consensus forecast, respectively.

Deviations

Largely in line.

Dividend

None.

Highlights

Its FY13 strategic priorities of accelerate regionalization, move to high performance culture and change the cost structure have yielded positively as reflected in 3Q results.

Positives from 3Q results are: 1) NIM stabilized qoq; 2) loans growth strong and tracking close to its KPI; 3) CASA growth well ahead of overall expansion, CASA ratio highest since Sep 11 and among peers; 4) widening JAW (income growing faster than overheads); and 5) sustained noninterest income (albeit boosted by forex gain and insurance arm portfolio gain but partly offset by MTM loss).

Despite the above positives and absence of lumpy provision, 3Q results were partly dragged by relatively high provision given that BII recorded an uptick in asset quality.

Management guided for strong IB pipeline in 4Q and for earnings to be on track to meet its FY13 ROE KPI.

Despite the uptick in BII asset quality and third consecutive quarter of rise in group Impaired Loans amount (albeit improving ratio), management highlighted that there is no major systematic risk noted. Net Impaired Loans formation in 3Q was stable. Moreover, it has been conservative and proactive in provisioning. Credit charge guidance largely in line with 9M experience.

Others: NIM erosion of circa 10bps, Singapore has ample liquidity and well capitalized (no capital injection if local incorporation required) and it is open to other options rather than acquisition for expansion and is not limited to Thailand but not in hurry unless there is value proposition.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and significant slowdown in capital market.

Forecasts

Unchanged.

Rating

BUY

Positives – Improving domestic operations and expanding regional footprint, new divisions to better address competition and customer centric and new IB outfit gaining traction. DRP provides downside protection while giving additional boost (from the discount pricing of DRP) to industry leading dividend yield.

Negatives – DRP will drag ROE, recent deterioration in asset quality and exposure to Indonesia (fortunately it is only ~10% of profit).

Valuation

Target price maintained at RM11.36 based on Gordon Growth with ROE of 15.0% and WACC of 9.7%.

Source: Hong Leong Investment Bank Research - 22 Nov 2013