Results

4QFY13 net profit of RM504.5m (-9.8% qoq; +23.7% yoy) took FY13 to RM1,831.2m (+2.6% yoy) or in line with expectations, accounted for 100.4% and 103.9% of HLIB and consensus forecasts, respectively.

Deviation

Largely in line despite another RM126m lumpy provision (in 4Q) for the RM409m impaired (in 2Q) corporate loan.

Dividends

Final single-tier dividend of 10.3 sen or 16.3 sen (22.7% payout) for FY13, short of its 30% KPI and HLIB’s 22 sen (30% payout) projection. Due to ongoing negotiations (on financial holding company and double leverage ratio) with BNM, it decided to scale back the payout in FY13. However, it will strive to uphold the 30% payout policy in FY14, subject to the outcome of the negotiations.

Highlights

FY13 earnings characterized by good traction and growth in pre-provision profit, driven by loans growth, better NIM sustained yoy) management, strong non-interest income growth and merger synergy well ahead (more than doubled) of target. However, these were largely negated by lumpy provisions which saw credit cost almost tripled.

We remained positive about its prospects, especially after yesterday’s analyst briefing. As mentioned in our report dated 13 Feb entitled “Tide Finally Turning?”, we were encouraged that it made additional lumpy provision in 4Q to settle the uncertainties once and for all as the company will enter into 2014 with a much cleaner slate.

Moreover, the analyst briefing (please see next page for details) also reaffirm our view that operating profit traction is intact, especially with ample room to extract more merger synergies. These coupled with normalization of provision would anchor earnings growth and expected to help narrow the valuation gap and reverse the drag on sentiment and price performance in FY13. Despite our more conservative assumptions (vis-à-vis management KPIs), we are already expecting strong earnings growth and we view further upside (to our forecasts) as added bonus.

Risks

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

Forecasts

Post final results adjustments with FY14-15 marginally higher by less than 1%.

Rating

BUY

Positives - Valuations still lagging behind especially after FY13 underperformance; transformation and merger bearing fruits, reflected in strong loan growth and improving asset quality, strong IB pipeline and sustained NIM; “Easy” and tie-up with Pos M’sia added different growth dimension.

Negatives - Low liquidity, ROE second lowest among peers and entry into Indonesia via Mestika dragging far too long.

Valuation

Target price maintained at RM9.59 based on Gordon Growth with ROE of 11.9% and WACC of 10.6%.

Source: Hong Leong Investment Bank Research - 25 Feb 2014