Results

• 3QFY14  net  profit  of  RM544.6m  ( -2.1%  qoq;  -2.6%  yoy) took  9MFY14  to  RM1,551.8m  (+17%  yoy)  or  accounted  for 74.3%  and  77.3%  of  HLIB  and  consensus  forecasts , respectively ,  in line.   

Deviation

• Largely in line.

Dividends

• None.

Highlights

Strong  3Q  results with s ustained double- digit loans growth, stronger  non-interest  income  (+24%  qoq)  and  wider sequential  JAW  (overheads  growth  slower  than  income growth).  

9MFY14  recorded  17%  yoy  growth  on  positive  underlying trends   mentioned  above  and  absenc e  of  lumpy  provision. Although it was boosted by impairment write- back, the one off boost was largely offset by additional provision (for loans more than three months in arears)  required  by authority.   

Although  9MFY14  annualized  ROE  of  11.8%  is  slightly below KPI of more than 12% (and HLIB’s 12% forecast), it is not changing the yardstick and is confident of  achieving as the  momentum  in  3Q  is  expected  to  sustain  into  4Q , absence  of  the  additional  provision  (loans  3-month  in arears)  and lower  credit charge vis -à-vis  earlier  guidance.

RHB -OSK  integration  on  track  to  exceed  initial  synergy projection and  has already contributed to the traction in non interest income growth.

New  trans formation  program  (IGNITE  2017)  is  progressing well  and  has  also  contributed  to  the  strong  results  (higher Islamic and non-interest  income.

M&A  with  CIMB  and  MBSB  give  market  leadership  in Malaysia,  strengthen  regional  scale,  new  growth  area (Islamic  bank ing),  synergy  and  value  creation  (higher liquidit y  and  priced  at  premium).  Dedicated  team  to  deal with integration  to ensure  BAU momentum is sustained

Asset  quality continued  to  improve  with  comfortable  capital ratios.            

Risks

• Unex pected  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  es pecially  after FY13 underperformance; trans formation  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 maintained at RM10.00 or 1.4x merger P/B (vs. RM10.028  merger  valuation).

Source: Hong Leong Investment Bank Research - 21 Nov 2014