Results

2QFY14 net profit of RM131.2m (-4.8% qoq; -7.5% yoy) took 1HFY14 to RM269m (+1% yoy) or accounted for 48.7% and 46.6% of HLIB (in line) and consensus (below) forecasts respectively.

Deviations

Largely in line.

Dividend

None. Already paid first interim single-tier dividend of 7.5 sen (vs. 6.6 sen) on 16 Aug.

Highlights

2Q sequential results supported by continued loans growth, stable NIM (albeit significantly lower yoy), lower overheads (JAW widened) and provision write-back but largely offset by lower non-interest income (partly due to the absence of RM30m one-off sign-on fee from Manulife in 1Q).

YTD, strong loans growth was negated by sharply lower NIM and further dragged by provision vs. write-back previously. Main earnings drivers were non-interest income (excluding EI in both periods) and well contained overheads (again JAW widened).

Loans growth continued to be strong at double-digit yoy, as guided by management (driven by purchase of securities, HP, mortgages and non-residential), and ahead of industry average for six consecutive quarters. While SME was slow in 1HFY14, management expects this to accelerate in 2HFY14 given existing pipeline and flow-through impact of ETP projects.

Deposits growth kept pace with loans growth with CASA ratio at 33.4%, among the highest within peers.

Asset quality continued to improve while capital ratios also remained strong (among the highest and 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 for eight consecutive quarters).

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 - 2 Dec 2013