Results

2QFY15  net  profit  of  RM445.8m  (-17.1%  qoq;  +1.1%  yoy) took  1HFY15  core (excluding RM208m profit from sale of  life insurance  arms   to  MetLife  in  1QFY15  and  RM76m  merger related  cost  with  bulk  recorded  in  1QFY15)  to  RM851.1m (-5.7%  yoy)  or  only  accounted  for  43.4%  and  47.4%  of  HLIB and consensus, respectively ,  below  expectations .   

Deviations

Contraction  in  loans  growth  (more  cautious  stance),  sharp contraction  in  NIM  (especially  in  1Q  with  60%  of  the  drop attributed  to  the  life  insurance  deal  and  one-offs),  and continued  weak  non-interest  income.  Despite  stronger performance  in  2Q,  it  was  still  not  sufficient  to  offset  the weak 1Q and  meet our earlier expectations.

Dividend 

• Interim  dividend  of  12  sen  (vs.  7.2  sen).   Despite  higher dividend,  it  is  not  changing  the  policy  of  40-50%  but  rather altered  payment  proportion  from  1/3  and  2/3  to  50%  (of expected full year payout) for  1H and 2H, respectively.     

Highlights 

Stronger  2Q  attributed  to  lower  overheads  (although  it expects  2H  to  be  similar  to  1H  from  regulatory  and  core system costs) and lower provision (as a result of its efforts to only  accept  high  quality  loans,  especially  HP  and commercial property  loans).  

Loans  growth  to  track  behind  industry  average  due  to  the ongoing  rebalancing  of HP and commercial property loans.

Lower  FY15  KPIs  (PATAMI  growth  8%  vs.  10%;  ROE  of 14%  vs.  14.2-14.5%;  and  loans  growth  3%  vs.  9%)  and FY16-17  KPIs  (PATAMI  growth  6-10%  vs.  9-11%;  ROE  of 14%  vs.  14.5-15.5%).   Only  positive  change  was  to  lower FY15 credit cost to 15bps vs. 30bps.

Comfortable  with  capital  position  and  working  on  IRB approach  which  will  normally  result  in  more  efficient  capital requirement  but implementation  in three  years’ time.

Asset quality continued to improve.  

Risks

• Unexpected  jump  in  impaired  loans ,  lower  than  expected loan growth  and impact from  lower  capital markets activities .

Forecasts

• FY15-17  Forecasts cut  by  10.5-11.6%  to  reflect  the  weak 1HFY15  results  and  lowered KPIs .  Note that our forecasted ROE is now below  the company’s KPI.

Rating

HOLD

• Positives  –  Value  propositions  from  ANZ  have  improved asset  quality,  risk  management  and  competitiveness . I mproving  ROE  and  higher  dividend  guidance  as  well  as focus  on  profitable  growth  are  bearing  fruits.  Recent mergers  and  life  insurance  partnership  to  enhance  recurring non-interest  income  over  longer term.
• Negatives  –  High  LD  ratio  and  relatively  high  earnings sensitivity to capital markets .

Valuation

• Maintain  Hold  with  target  price  cut  to  RM6.72  (vs.  RM7.77) based  on  Gordon  Growth  (ROE  of  12.8%  and  WACC  of 10.9%)  post earnings  forecasts downgrade.

Source: Hong Leong Investment Bank Research - 20 Nov 2014