Results

4QFY14 net profit of RM158m (+15.8% qoq; +13.8% yoy) took FY14 to RM563.5m (+4.7yoy) or accounted for 102% and 100.1% of HLIB and consensus forecasts, respectively.

Deviations

Largely in line.

Dividend

Surprise single-tier special dividend of 10.5 sen. Taking total for FY14 to 29.5 sen or payout of 80%, well above its 50% policy and our projection.

New policy is 60%, another positive surprise.

Highlights

4Q results boosted by strong loans growth, impairment write-back, securities gain and provision write-back. Partly offset by lower NIM and higher overheads.

Although 4Q earnings drivers (write-backs and securities gains) may not sustain, overall FY14 earnings recorded good traction in loans growth, transaction income and cost containment. These factors are expected to play a major role in FY15 earnings performance.

Asset quality continues to improve while capital ratios remained robust.

Impact of OPR hike is positive (only 10% loan book is fixed while CASA is one of the highest among peers). Impact of treasury book on earnings minimal as it has limited HFT securities while AFS securities have short duration.

Impact of minimum 1.2% CA is circa 24bps on CET1 but it will remain above 10%.

The combination of higher dividend payout and policy as well as strong capital ratio suggest reduced likelihood of cash call and the eventual dilution, unlike other peers. Coupled with recent retracement in share price, positive impact from rate hike, traction in loans growth and overheads as well as strong asset quality and CASA franchise, we are now turning more positive and upgrade the stock to BUY.

Risks

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

Forecasts

Fine-tuned post final results with FY15-16 earnings forecasts largely unchanged.

Rating

BUY

Positives – Strong asset quality and deposit franchise (the latter helps in protecting NIM), strong niche in consumer and SME, potential M&A excitement and ample room for more active capital management given its robust capital. Transformation has resulted in strong loans growth.

Negatives – Stiff competition from significantly larger players with bigger scale and reach as well as relatively lower liquidity against peers.

Valuation

Target price raised to RM5.25 (vs. RM5.24) based on Gordon Growth with ROE of 14.2% and WACC of 10.3%.

Source: Hong Leong Investment Bank Research - 23 May 2014