Results

1QFY14 net profit of RM1,601.6m (-7.5% qoq; 6.3% yoy), in line or accounted for 23.3% and 23.4% of HLIB and consensus forecasts, respectively.

Deviations

1Q 13.8% ROE below 15% KPI and HLIB’s 14.6% but no change to KPI. Expects catch up, especially 2H, on loans growth, cost efficiency and some signs of recovery in fees (better deal pipeline but brokerage and loan fees still muted). We note that 1Q contribution from insurance was negatively impacted by change in contract liabilities while JAW was positive. Thus, maintain our forecasts.

Dividend

None.

Highlights

1Q was sequentially lower due to flattish net interest income, slightly lower non-interest income and higher provisions (deterioration in asset quality) but partly offset by lower overheads. On yoy basis, despite the higher provisions, it managed to record decent growth on higher operating income (both fund and fee based) and well contained overheads.

Despite the tough operating environment (see next page for details), we take comfort that is has managed to contain overheads resulting in positive JAW qoq and yoy. Moreover, although provisions were higher, annualized charge rate was 23bps vis-à-vis KPI of 30-35bps and HLIB’s 33bps assumption.

Asset quality deteriorated due to corporate legacy accounts in Malaysia and global markets in Indonesia. Asset quality in Malaysia is expected to remain intact in the absence of systemic risk and material trends as the deterioration in 1Q was due to legacy. However, Indonesia still challenging.

It is still comfortable with capital position given the RM3.66bn raised back in Oct 12, subject to BNM guidance on counter cyclical buffer which the central bank has yet to provide any indications. As for the potential Singapore incorporation, the unit has sufficient retained earnings for such purpose.

Risks

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

Forecasts

Unchanged.

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 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 May 2014