Results

QFY13 net profit of RM559.1m (+36.3% qoq; +14.7% yoy) took 9MFY13 to RM1,326.7m (-3.6% yoy) or 72.7% and 75.7% of HLIB and consensus forecasts, respectively.

Deviation

Largely in line despite the company registered RM30m income from a legacy lawsuit.

Dividends

None.

Highlights

Strong earnings rebound due to continued loans growth (ahead of industry average), stable NIM, higher non-interest income and lower provision.

May miss some FY13 KPIs while no issues in meeting others. Most importantly, may miss ROE KPI of 12% (although not changing) but HLIB already forecast 11.6%.

Asset quality (both amount and ratio) improved after uptick in ratio (2Q) and amount (1Q and 2Q). No additional provision required for the manufacturing corporate account. As for the second corporate account, made RM33m provision and RM10m impairment in 3QFY13. Despite the lumpy item, overall provision still managed to trend lower qoq. May have additional provision in 4QFY13 but amount uncertain as the second corporate is undertaking restructuring.

Despite this risk, investor should look beyond 2013 given that once the issue is resolved, its underlying trends suggest that FY14-15 would see earnings recovering and grow at double-digit rate on top of valuations that still lags behind peers.

NIM stabilized due to higher LDR (but still within comfort zone), efforts to change deposits composition to reduce expensive deposits and focus on higher yielding assets. Management hopeful of continue stability in 4QFY13.

Capital ratios remained robust.

Merger synergy with OSK ahead of target. Mestike unlikely this year and awaiting feedback from authorities, probably in early Jan 2014.

Risks

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

Forecasts

Unchanged.

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 maintained at RM9.21 based on Gordon Growth with ROE of 11.8% and WACC of 10.3%.

Source: Hong Leong Investment Bank Research- 2 Dec 2013