Results

4QFY13 net profit of RM166.9m (-3.5% qoq; +4.1% yoy) took FY13 to RM650m (+3.4% yoy), above our expectations (106.9%) but in line with consensus estimate (103.8%).

Deviations

Mainly due to second highest quarterly provision write-back from significant jump in recovery (more than doubled qoq and almost doubled yoy) which more than offset provisions.

Dividends

No more dividend as it has already paid 15 sen single-tier dividend or a payout of 35%, in line with our projection.

Highlights

4QFY13 results were mainly boosted by provision writeback (mainly due to large recovery). Otherwise, it was a weak quarter despite continued loans growth due to NIM erosion (which resulted in net interest income lower qoq and yoy), lower qoq non-interest income (albeit higher yoy) and narrowing JAW.

FY13 also saw similar trend and would have shown a decline if not for the higher provision write-back.

Given that we do not expect the high recovery (and hence provision write-back) to continue indefinitely, we are only projecting a meager earnings growth in FY14 which translate into a ROE of 10%.

For FY14, the company has set ROE KPI of 9.2% (due to intention to raise RM1.25bn from right issue to fund the acquisition of Hwang IB. Recall that in our report dated 23 Jan 14, we estimated that the Hwang IB acquisition and the subsequent right issue will boost earnings by 2.7% but EPS will be diluted by 17.7% while ROE will reduce by circa 100bps. This implies that our FY14 forecasted 10% ROE would decline to 9% post rights issue, in line with its KPI of 9.2%.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and intense competition from larger peers.

Forecasts

Post final results adjustments, FY14-15 raised by 0.7-2.3%.

Rating

HOLD

Positives

• Improving asset quality, profitability and Tier-1 capital purely equity;
• Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM50bn (less than half of the next largest bank, AMMB).

Negatives:

• Investors’ perception and its delinquency track record.
• One of the lowest NIM among peers, lowest ROE in industry, low deposit franchise (CASA only 21% of total) and one of the highest percentage of fixed rate loans.

Valuation

Following earnings forecasts adjustments, target price raised to RM4.26 based on Gordon Growth with ROE at 10% and WACC at 10.8% vs. RM4.10.

Source: Hong Leong Investment Bank Research - 27 Feb 2014