Results

BII reported 1QFY14 net profit of Rp189bn (-58% qoq; -39% yoy), below our expectations.

Deviations

Higher-than-expected provisions for selected corporate debtors and squeeze on NIM.

Highlights

Loans growth grew 27% yoy but contracted 1% qoq amid challenging market conditions and adverse trend in overall industry growth. Meanwhile, deposits grew 25% yoy but also contracted by 3% qoq. As a result, Bank level LDR increased slightly to 88.9% vs. 87% in 4QFY13.

NIM was impacted by rising cost of funds and challenging market conditions with a drop of 55bps to 4.03%.

BII also experienced some asset quality deterioration in a number of Global Banking Debtors related to commodities and structured trade financing. The lower export activities and sharp rise in interest rates also impacted NPL. Although gross and net NPL rose to 2.05% and 1.43% vs. 1.47% and 0.62% in Mar 13, it still managed to improve sequentially from 2.11% and 1.55%, respectively. Overall, this impacted provision which increased by 72% yoy.

Fee based income also lower yoy by 3% mainly due to subsidiaries but partly offset by positive impact from Global Market and cash management services.

On more positive note, both its subsidiaries, BII Finance and WOM, recorded yoy earnings growth while NPL were contained and improved, respectively.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and significant slowdown in capital market.

Forecasts

Unchanged for now pending Maybank’s 1QFY14 results to be released tentatively on 29 May.

Fortunately, BII only contributed about 7.4% to group’s FY13 PBT, thus, the impact of the poor BII results will be more muted vis-à-vis Niaga impact on CIMB. Even if we annualized the 1Q results, it works out to about 3-4% drag on Maybank’s group earnings, ceteris paribus.

Rating

BUY

Positives – Improving domestic operations and expanding regional footprint, new divisions to better address competition and customer centric and new IB outfit gaining traction. DRP provides downside protection while giving additional boost (from the discount pricing of DRP) to industry leading dividend yield.

Negatives – DRP will drag ROE, recent deterioration in Indonesia asset quality (but fortunately BII is only ~7% of profit).

Valuation

Target price maintained at RM11.98 based on Gordon Growth with ROE of 14.9% and WACC of 9.7%.

Source: Hong Leong Investment Bank Research - 30 Apr 2014