Results

2QFY14 net profit of RM112m (-21.5% qoq; -29.7% yoy) took 1HFY14 to RM254.7m (-17.9% yoy) or accounted for 42.1% and 39.4% of HLIB and consensus full year forecasts, respectively.

Deviations

Mainly due to provision (reversed from write-back) arising from significantly higher Individual Allowance (IA) and significantly lower recovery. The spike in IA (despite stable asset quality) was due to the jump in Impaired Loans (IL) formation (more than doubled qoq and yoy).

Moreover, the inclusion of Hwang IB’s PBT since 7 Apr 14 (almost full quarter) which amounted to RM25.4m was more than offset by RM16.5m finance cost and RM9.6m transaction and integration costs.

Dividends

None.

Highlights

Despite inclusion of income from Hwang IB, 2QFY14 results were hit by lower yoy NIM (albeit stable qoq), slower loans growth, one-off costs associated with acquisition of Hwang IB (as mentioned above), additional cost from Hwang IB and most significantly, the sharp jump in provision.

Despite guidance of RM84m PBT boost from Hwang IB for FY15-17 and absence of finance cost, integration cost of RM54m over next 12-18 months as well as the dilution impact from the recently completed rights issue will drag EPS. Moreover, guidance is for the merger to only reach stable stage in FY18 with synergies of RM43m per annum.

The sharp jump in IL formation, if continue, would be another drag on earnings.

Risks

Unexpected jump in impaired loans, lower loan growth and intense competition from much bigger peers.

Forecasts

FY14-16 forecasts adjusted to reflect acquisition of Hwang IB, rights issue and the higher provision. Thus, net profit was raised by 3-11% but EPS cut by 11-15%.

Rating

HOLD

Positives

• Improving asset quality, profitability and Tier-1 capital purely equity;
• Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM50bn (less than half of the next largest bank, AMMB).

Negatives:

• Investors’ perception and its delinquency track record.
• One of the lowest NIM among peers, lowest ROE in industry, low deposit franchise (CASA only 21% of total) and one of the highest percentage of fixed rate loans.

Valuation

Maintain Hold. Target price slightly lowered to RM3.44 (from RM3.45) based on Gordon Growth with ROE at 8.6% and WACC at 9.5%.

Source: Hong Leong Investment Bank Research- 18 Aug 2014