Highlights

Management reiterated that the recently completed private placement is to ensure group’s CET1 (proforma post placement of 9.7%) is within target of 9.5-10%, after taking into consideration the sharp depreciation of Rupiah.

On BNM’s new lending rate framework, it view that there will be no change to the effective rate charged on BLR based loans as the main purpose is to have a prime rate which is more reflective of the marginal funding cost (KLIBOR), SRR and liquidity premium rather than having a negative spread.

On Niaga, competition is now more sensible (in terms of pricing and credit terms), which makes the landscape more conducive. Asset quality still holding up well but conceived that there will be stress points after the sharp rate hike, 1Q14 critical period to monitor. However, it also believes the country’s fundamentals will improve. Coupled with its conservative stance since early 13, asset quality issue should be well contained.

Others: 1) Thailand finally showing progress in FY13 but uncertainties due to the political impasse; 2) NIM stable in Malaysia, Singapore and Thailand but compression in Indonesia, overall, slight erosion at group level; 3) IB pipeline mixed with strong bond, rates and FX and trade businesses but uncertain about equity while Thailand deals being delayed; 4) RBS on track to breakeven in FY14; 5) 1Platform ready for implementation in Malaysia after Thailand and Singapore with Indonesia next in line. Cost savings mitigated by amortization of the new core banking system cost but more important is the ability to significantly boost revenue; and 6) anticipation of NAP resulted in sharp decline in applications for HP but since car prices not coming down in the near term, expect to normalized.

Overall, we believe execution of its strategy is progressing well but price performance could be bogged by issues (Indonesia asset quality, Thailand political impasse and uncertain equity pipeline) which affect near term sentiment.

Catalysts

Gaining more traction in cost rationalization, better than expected non-interest income growth, turning into an APAC universal bank and more active capital management.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

Unchanged pending results announcement on 25 Feb.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform.

Negatives – Impact on non-interest income if capital markets soften and from higher Indonesia interest rate.

Valuation

Target price maintained at RM7.81 based on Gordon Growth with ROE of 14.2% and WACC of 11%.

Source: Hong Leong Investment Bank Research - 22 Jan 2014