Results

• 3QFY14 net profit of RM144.3m (+28.9% qoq; -16.3% yoy) took 9MFY14 to RM 399.1m (- 17.4% yoy) or accounted for 63.9% and 67.4% of HLIB and consensus full year forecasts , respectively , below expectations.

Deviations

• Mainly due to higher-than -expected overheads whic h jumped 14.7% qoq arising from additional RM24.1m integration cost incurred in 3Q, on top of the RM9.6m transaction and integration costs in 2Q. Excluding integration cost, overheads still expanded by 9.5% qoq.

Dividends

• Interim single-tier dividend of 15 sen (in line with its policy of 50% payout) vs. 15 sen previously. Ex and payment dates are 11 and 30 Dec, respectively.

Highlights

3QFY14 results were stronger qoq due to acceleration in loans growth (reversed the sequential c ontraction in 2Q), higher NIM (from OPR hike and absence of RM16.5m financing cost for the acquisition of Hwang prior to completion of the rights issue), higher non-interest income and lower provision. Partly offset by higher overheads .

YTD integration cost RM33.7m, still has another RM20.3m over next 9-15 months based on guidance of RM54m total.

Impaired loans ratio was flat yoy despite qoq rise in absolute amount due to acceleration in loans growth (after contraction in 2Q).

Risks

• Unexpected jump in impaired loans, lower loan growth and intense competition from much bigger peers.

Forecasts

• To reflect higher overheads as well as the transaction and integration cost, FY14 forecast cut by 11% while FY15 -16 forecasts cut by 6.4-6.5%.

Rating

HOLD

Positives

• Improving asset quality, profitability and Tier-1 capital purely equity while acquisition of Hwang enhance its market share in broking;
• Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM50bn (less than half of the next largest bank, AMMB).

Negatives

• Investors’ perception and its delinquency track record.
• One of the lowest NIM among peers, lowest ROE in industry, low deposit franc hise (CASA only 21% of total) and one of the highest percentage of fixed rate loans.
• Short-term drag and dilution from ac quisition of Hwang (trans action and integration costs) and the subsequent rights issue to fund the acquisition.

Valuation

• Maintain Hold. Target price cut to RM2.90 (vs . RM3.44 previously) based on Gordon Growth with ROE at 8% and WACC at 9.3%.

Source: Hong Leong Investment Bank Research - 25 Nov 2014