Results

• 3QFY14  net  profit  of  RM1,191.5m  (+12.8%  qoq;  +13.8% yoy)  took  9MFY14  to  RM3,264.8m  (+7.4% yoy),  in line with HLIB’s  and  consensus  or  accounted  for  75.1%  of  both  ours and  consensus forecasts .  

Deviations

• Largely in line.

Dividends

• None  as  dividend  are  usually  declared  during  2Q  and  4Q results announcements .

Highlights 

Loans  growth  and  ROE  in  line  with  its  KPIs.  Deposits growth was slightly lower at 8.5% yoy (9.3% annualized) vis à-vis  its KPI of 10-11%.

3Q14  earnings  were  strong  and  made  up  for  the  slightly slow  1H  (which  only  accounted  for  47-48%  of  HLIB  and consensus  forecasts ).   It  was  mainly  boosted  by  continued loans  growth,  higher  sequential  NIM  (as  a  result  of  OPR hike),  higher  non-interest  income,  lower  overheads  and lower  provision  (lower  CA and  higher  recovery).  

It  has  complied  with  BNM’s  regulatory  reserve  requirement (CA  and  regulatory  reserve  of  no  less  than  1.2%  of  total loans  net  of  IA)  ahead  of  the  31  Dec  2015  deadline  via transfer  of  RM1.25bn  from  retained  earnings  to  reg ulatory reserve.   This  has  resulted in 0.6% reduction in CET1 and a corresponding  increase  in  Tier-2  capital,  in  line  with  earlier guidance  on impact.   

However,  the  impact  was  more  than  offset  by  the  recently completed  (in  Aug  2015)  RM4.8bn  rights  issue  which,  on  a net basis, boosted CET1  to more than 10%.

I mpaired  loans  ratio  continued  to  improve  (albeit  less  than 1bps)  despite  seventh  consecutive  quarter  of  higher impaired  loans  absolute  amount  due  to  sustained  loans growth.   LLC  continued  to  stay  abov e  110%  while annualized  net  impaired  loans  formation  was  stable  at 37bps vs. five-year  average  of 39bps.

Risks

• Unexpected  jump  in  impaired  loans ,  lower  than  expected loan growth  and higher than expected erosion in NIM.

Forecasts

• Unchanged.

Rating

HOLD

Positives:

• Above  industry  asset  quality  and  stronger  capital position post rights issue;
• Excellent  track  record  in  delivering  guidance  and consistency in growth.

Negatives:

• Uncertainty about quantum  of counter cyclical buffer.
• ROE dilution from rights issue.

Valuation

• We  maintain  our  target  price  at  RM18.32  based  on  Gordon Growth  with ROE of 16.6% and WACC of 8.2%.

Source: Hong Leong Investment Bank Research - 24 Oct 2014