Results

2QFY14 net profit of RM949.9m (-10.9% qoq; -9.9% yoy) took 1HFY14 to RM2,016.2m (-17.4% yoy; -2.8% yoy if exclude the RM515m profit from sale of CIMB Aviva and RM150m net restructuring charges in previous year) or accounted for 40.9% and 43.5% of HLIB and consensus forecast, respectively, below expectations.

Deviation

Lower-than-expected contribution from CIMB Niaga (2Q earnings plunged on significant provision hike due to sharp deterioration in asset quality and Rupiah depreciation), weak Treasury and Markets (due to low volatility) and weak IB (low equity volume and ECM deals as well as higher costs).

Dividends

First interim single-tier of 10 sen (vs. 12.82 sen) or 41% payout (vs. 40%) all under Dividend Reinvestment Scheme.

Highlights

Despite slower loans growth and lower Islamic income, 1HFY14 net interest income was helped by sustained NIM. However, it was offset by lower non-interest income and higher provision. Although overheads were lower, it declined slower than income contraction (negative JAW).

In terms of divisions and/or countries, Malaysia consumer, regional corporate banking (ex-Indonesia), Singapore and Thailand registered growth while Indonesia, treasury & market and IB were weaker.

Not changing ROE KPI of 13.5-14% but acknowledges risk to target given uncertainties in Indonesia. Expects stronger performances from most divisions/countries expect for regional corporate banking and Indonesia. Franchise well positioned for market recovery.

Its main lingering concern is corporate asset quality in Indonesia. Situation still fluid, awaiting new government and potential new/change in policy. No clarity on 40% foreign cap, diversify earnings base to mitigate if materializes.

Reassured CIMB-RHB-MBSB merger only if value creative. If falls through, still keen to participate in consolidation.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

FY14-16 forecasts cut by circa 11% to reflect the above mentioned deviations.

Rating

HOLD

Positives - Proxy to economic growth and capital markets as well as growing regional universal bank platform and the new core banking system (1Platform).

Negatives – Impact on non-interest income if capital markets soften and impact on asset quality from higher Indonesia interest rate.

Valuation

Target price cut to RM7.22 (vs. RM7.74) based on Gordon Growth with ROE of 12.1% and WACC of 9.8%. Maintain Hold, short-term price may still be dragged by uncertainties in Indonesia, despite potential M&A excitement

Source: Hong Leong Investment Bank Research - 2 Sep 2014