Results

1QFY14 net profit of RM1,066.3m (+2.7% qoq; -23.1% yoy) accounted for 21.6% and 22.3% of HLIB and consensus forecast, respectively.

Deviation

While 1Q was below expectations as ROE was only 13% and short of its target of 13.5-14%, management is not changing its KPIs. Given that our ROE projection is at the lower end of its KPI, we are giving the benefit of doubt and maintain our forecasts for now but cognizant of the challenges in Indonesia and Thailand.

Dividends

None.

Highlights

Positives from the 1QFY14 results are loans growth, lower overheads (but CIR higher sequentially due to weaker income), lower credit charge as well as growth in Malaysia consumer banking, regional corporate banking and Singapore. Negatives are lower contribution from Indonesia, soft start for Treasury & Markets and IB challenged by weak equity market amid enlarged cost (RBS).

Asset quality continues to improve in 4QFY14 with its largest market, Malaysia, expected to remain stable and intact. Despite macro improvement in Indonesia, still need to keep close monitoring of asset quality there given some signs of stress by peers.

In view of headwinds in Indonesia and Thailand as well as tough capital markets, its focus will be on growing the markets / business that have performed well, actively manage balance sheet to optimize NIM and cost management while keeping a close watch on asset quality of Indonesia and Thailand.

Still interested in Philippines and prefer mid-size entity. Potential new regulation to own up to 100% of banks could take time but does not rule out initial partial ownership with roadmap to full control to capitalize on the potential new regulation.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

Unchanged.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform and the new core banking system (1Platform).

Negatives – Impact on non-interest income if capital markets soften and impact on asset quality from higher Indonesia interest rate.

Valuation

Target price maintained at RM7.74 (Gordon Growth with ROE of 13.7% and WACC of 10.5%).

Maintain Hold as uncertainties and challenging operating environment in Indonesia and Thailand likely to remain a drag to share price performance and investors sentiment.

Source: Hong Leong Investment Bank Research - 23 May 2014