Results

1QFY14 net profit of RM142.7m (-14.5% qoq; -5.4% yoy) was below our expectations and consensus or only accounted for 21.7% of both HLIB and consensus full year forecasts.

Deviations

Mainly due to second sharp drop in NIM as well as lower non-interest income and associate contribution.

Dividends

None.

Highlights

1QFY14 results were hit by continued decline in NIM, weaker non-interest income, lower provision write-back and lower contributions from associates. These were partly offset by continued loans growth of 10.1% yoy (in line with 10.2% industry average) and qoq decline in overheads.

The acquisition of Hwang IB is expected to provide synergies but due to integration cost, we believe any benefits over the next 12-18 months will be mitigated. Management also guided that it will only hit a stable stage in FY18. Thus, we remained neutral on the M&A given that complementary businesses and potential synergies will be negated by dilution to EPS, ROE and capital ratios (from the planned RM1.25bn rights issue).

Moreover, given that its share price has depreciated by 11.8% since the announcement of acquisition details, our initial EPS dilution estimate of 18% could be larger as it may need to issue more shares to raise the intended amount of RM1.25bn).

Risks

Unexpected jump in impaired loans, lower than expected loan growth and intense competition from much bigger players.

Forecasts

FY14-16 forecasts cut by 8-10% to account for lower NIM, non-interest income and associate contribution. ROE is now lower than its FY14 KPI of 9.2% (post RM1.25bn rights issue).

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 cut to RM3.86 (from RM4.26) based on Gordon Growth with ROE at 9.2% andWACC at 10.3%.

Source: Hong Leong Investment Bank Research - 20 May 2014