Results

2QFY14 net profit of RM1,056.4m (+3.9% qoq; +3.2% yoy) took 1HFY13 to RM2,073.3m (+4.1% yoy) in line with HLIB’s forecast or accounted for 47.7% but slightly below consensus or accounted for 47%.

Deviations

Largely in line.

Dividends

First interim single-tier of 23 sen (vs. 22 sen). New rights shares are entitled to the dividend. Ex and payment dates are 8th and 20th Aug, respectively.

Highlights

Loans and deposits growth as well as ROE in line with its KPIs. 2Q14 earnings was mainly boosted by lower provision (annualized 11bps arising from higher recovery) but is expected to normalize in subsequent quarters with full year guidance at less than 20bps. Other than provision, earnings growth was underpinned by continued loans and non-interest income growth (the latter largely due to Public Mutual), partly offset by lower NIM and higher overheads (albeit CIR is below its 32% KPI).

FY14 KPIs largely unchanged except for ROE which has been reduced from more than 20% to more than 18% to reflect the rights issue.

NIM is expected to decline 10-12bps for FY14 while it is focusing on SME loans, securing more used cars loans and new exclusive arrangement for civil servant salary deduction scheme to seek higher yield and protect NIM.

Asset quality sustained as impaired loans ratio improved 1bp despite 1.5% qoq rise in absolute amount. Guiding for ratio to remain stable.

Post rights issue proforma CET1 at 10.6%. Planned early adoption of BNM’s minimum 1.2% CA and regulatory reserves which will shave 0.6% from CET1.

Dividend to be stable and sustainable, in line with earnings and payout ratio will mirror FY13, in line with our projection.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and higher than expected erosion in NIM.

Forecasts

Factored in the impact of its rights issue.

Rating

HOLD

Positives:

• Above industry asset quality and stronger capital position post rights issue;
• Excellent track record in delivering guidance and consistency in growth.

Negatives:

• Uncertainty about quantum of counter cyclical buffer.
• ROE dilution from rights issue.

Valuation

We maintain our target price at RM18.32 based on Gordon Growth with ROE of 16.6% and WACC of 8.2%

Source: Hong Leong Investment Bank Research - 25 Jul 2014