Results

2QFY14 net profit of RM556.5m (+23.5% qoq; +35.6% yoy) took 1HFY14 to RM1,007.2m (+31.2% yoy) or accounted for 48.2% and 50.3% of HLIB and consensus forecasts, respectively.

Deviation

Largely in line.

Dividends

None amid merger negotiations.

Highlights

The results have some positive underlying trend i.e. strong loans and CASA growth momentum, relatively sustained NIM and strong Islamic income growth. These were offset by higher overheads and the weak IB and treasury divisions.

Results also boosted by writebacks in impairment (one large account recovery) and IA (improvement in rating models).

Although 1HFY14 is slightly below KPIs, it is not changing the yardsticks and is confident of achieving them premised on strong 2H due to: 1) 1H included RM30m forex loss from deposit for Mestika and RM100m additional provision for loans more than 3 months in arrears; 2) traction in underlying (loans, CASA and Islamic income) momentum; 3) RM20m benefit from Jul OPR hike; 4) Recovery in deal pipeline conversion and stockbroking activities; 5) traction in IGNITE 2017 transformation programme; and 6) despite guiding for higher credit charge, it see opportunities in improving rating models (to lower provision) and RWA optimization under IRB approach.

Merger negotiations make sense from shareholder perspective via creating a larger regional platform and improve liquidity (both market capitalization and trading volume). However, negotiations outcome will depend on potential execution risk, synergy, new opportunities and regional opportunities for a mega Islamic bank. However, merger is not a necessity as it is confident of achieving its IGNITE 2017 aspirations. Targeting end Sep to reach a decision to avoid potential impact on momentum (which is still intact).

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 prolonged M&A negotiation may impact momentum.

Valuation

Target price raised to RM10.00 (vs. RM9.59) as we now adopt the lower end of a M&A valuation situation which we believe will be in the range of 1.4-1.5x P/B.

Source: Hong Leong Investment Bank Research - 28 Aug 2014