Results

3QFY14 net profit of RM136.5m (+4.0% qoq; +2.8% yoy) took 9MFY14 to RM405.5m (+1.6yoy) or accounted for 73.4% and 71.6% of HLIB (in line) and consensus (slightly below) forecasts respectively.

Deviations

Largely in line.

Dividend

None. Already paid second interim single-tier dividend of 11.5 sen (vs. 10 sen) on 31 Dec 13. YTD FY14 amounted to 19 sen (vs. 16.6 sen) or 53% payout (in line with 50% policy), which is already higher than our 18 sen projection.

Highlights

3Q results can again be characterized by continued strong loans growth (ahead of industry) and widening JAW (cost well contained). These were partly offset by lower NIM (albeit improved qoq) and non-interest income (due to impact of steepening yield curve on treasury income but overall level sustained qoq). Again, due to improving and strong asset quality provision remained low (despite turning from write-back to provision qoq).

Loans growth to remain strong at 13-14% due to strong start in Jan 14 and pent-up demand for mortgages in Dec 13 (ahead of RPGT hike and abolishment of DIBS) but NIM will continue to be under pressure. Nevertheless, its strong deposit franchise (CASA of 35%, among the highest in industry) should help to mitigate the pressure.

Asset quality continues to improve while capital ratios remained robust.

Impact of CA of 1.2% is marginal or 13bps on CET1.

New pricing framework still in discussion, clarity in 1-2 months.

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.

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 RM5.24 based on Gordon Growth with ROE of 13.6% and WACC of 10.3%.

Although share price has retraced to level with slightly more than 10% potential upside to our target price, we are maintaining our Hold rating to cater for price fluctuation. However, we do see some trading opportunity at current level, especially after a good set of results.

Source:Hong Leong Investment Bank Research - 14 Feb 2014