Results

1QFY14 net profit of RM450.7m (-10.7% qoq; +26.2% yoy) accounted for 21.6% and 22.4% of HLIB and consensus forecasts, respectively.

Deviation

1Q ROE of 10.6% was below FY14 KPI of >12% (and HLIB’s projection of 12%) but management indicated that it has visibility to hit 12%. This is on the back of room to reduce overheads, INSIGHT 2017 (its third phase of transformation and traction in synergies with OSK (1QFY14 of RM48m vs. full year target of RM112m). Thus, we are not changing our forecasts for now.

Dividends

None.

Highlights

1QFY14 earnings declined sequentially due to lower operating income but partly offset by lower overheads and absence of lumpy provision. However, it recorded strong yoy growth of 26% on continued loans growth, stable NIM, higher non-interest income and absence of lumpy provisioning. This was partially offset by higher overheads.

Despite higher yoy overheads, it declined qoq and the company believes that there is plenty of room to reduce this line item.

Although overall deposits growth was single-digit, its CASA expansion is gaining traction and was 12% yoy, ahead of 11% yoy loans growth. This helped the group to sustain NIM (although reported NIM was lower qoq due to absence of one-off adjustments which boost the number in 4QFY13).

Asset quality improved while capital ratios were intact.

Studying the recently published concept paper on financial holdings as well as engaging and/or feedback with BNM. With the concept paper, it is hopeful to have better clarity in terms of capital requirement and double leverage ratio. This should help the group to provide better clarity in terms of its dividend policy (previously 30% but was cut to 23% in FY13 for conservative purposes) during next briefing.

Mestika deal unlikely by deadline of Jun 14. If no positive developments, may not extend the deadline.

Risks

Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

Unchanged.

Rating

BUY

Positives - Valuations still lagging behind especially after FY13 underperformance; transformation and merger bearing fruits, reflected in strong loan growth and improving asset quality, strong IB pipeline and sustained NIM; “Easy” and tie-up with Pos M’sia added different growth dimension.

Negatives - Low liquidity, ROE second lowest among peers and entry into Indonesia via Mestika dragging far too long.

Valuation

Target price maintained at RM9.59 based on Gordon Growth with ROE of 11.9% and WACC of 10.6%.

Source: Hong Leong Investment Bank Research - 27 May 2014