Results

1QFY15 net profit of RM130.8m (-17.2% qoq; -5.1% yoy) accounted for 22.1% and 22% of HLIB and consensus forecasts, respectively.

Deviations

1Q ROE of 12.6% is short of its 14-16% medium term target and HLIB’s 13.8% projection. However, it is expecting FY15 to be better than FY14 (ROE of 13.8%) on continued top line growth (loans growth and sustained transactional fee income) as well as contained overheads (effective cost management which resulted in improved efficiency) and intact asset quality (certain deterioration in 1Q reversed in Jul). Thus, to give benefit of doubts, we are not changing our forecasts for now.

Dividend

None. Special dividend in 4QFY14 has aligned the timing of its dividend payment to 2Q and 4Q (in conjunction with results announcement) vs. before 1Q and 3Q results releases previously. Policy of 60% intact.

Highlights

Despite continued strong loans growth (15.2% yoy), 1Q results were dragged by erosion in NIM, lower non-interest income and qoq reversal to provision (vs. write-back in 4Q14). However, these were partly mitigated by the qoq and yoy decline in overheads (despite MSS cost), implying effective cost management.

General guidance: 1) loans growth to slow to 11-12% on slower demand (especially consumer segment); 2) NIM continued under pressure (especially from cost of fund); 3) overheads well contained and expect CIR to trend lower; and 4) asset quality intact as the 1Q deterioration in some purposes (like mortgage) has reversed in Jul, thus, this should help contain provision.

Asset quality – impaired loans ratio continued to improve as loans growth managed to offset the rise in absolute amount. Despite deterioration in HP, mortgage, cards and construction, overall ratio still improved.

Risks

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

Forecasts

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 maintained at RM5.25 based on Gordon Growth with ROE of 14.2% and WACC of 10.3%.

Source: Hong Leong Investment Bank Research - 12 Aug 2014