Results

2QFY14 net profit of RM1,575.5m (-1.6% qoq; +0.5% yoy) took 1HFY14 to RM3,177.1m (+3.4% yoy) or accounted for 46.2% of HLIB and consensus forecasts.

Deviations

Mainly due to lower-than-expected non-interest income given the challenging operating environment of its Global Markets and Investment Banking divisions.

Dividend

Interim single-tier of 24 sen (4 sen cash and 20 sen electable under its Dividend Reinvestment Plan) vs. 22.5 sen previously. This represents payout of 68.9%, in line with our assumption.

Highlights

Despite sustained loans growth, strong Islamic income growth, lower provision and positive JAW (overheads decline more than total income), 1HFY14 results were dragged by lower non-interest income or by the Global Markets and Investment Banking divisions.

Given that 1HFY14 ROE was only 13.5%, it has cut its ROE KPI from 15% to 14% as well as lowered loans growth (Malaysia and Indonesia) and deposits targets. However, it is still expecting stronger 2H (for ROE to catch up to 14% for the year) premised on better deal flow, pockets of opportunities for loans growth, more robust deposit gathering, cost management and stable asset quali

International contributions still short of its FY15 target (which was originally set with M&A intention) but any M&A would have to be accretive and there are not concrete deals yet.

Still awaiting clarification before decision on Singapore local incorporation. It has sufficient retained profits to undertake such exercise without further injection from parent.

Walked away from RHB Cap negotiation back in 2011 due to pricing. Thus, unlikely to be involved if CIMB-RHB-MBSB negotiations fall through on pricing.

Risks

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

Forecasts

FY14-16 forecasts cut by 3.4-4.9% to reflect chiefly lower non-interest income and other minor adjustments to reflect the 1H performance. Dividend projection also cut accordingly as we maintained payout ratio at 70%.

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

Subsequent to cut in forecasts, target price cut to RM11.47 (vs. RM11.98) based on Gordon Growth with ROE of 13.9% and WACC of 9.5%.

Source: Hong Leong Investment Bank Research- 29 Aug 2014