Results

• 3QFY14 net profit of RM1,608.1m (+2.1% qoq; -7.9% yoy) took 9MFY14 to RM4,785.2m (- 0.7% yoy) or accounted for 72% of HLIB and 71% of cons ensus forecasts. On annualized basis, the results are largely in line with HLIB (-4%) but slightly below consensus (-5.3%).

Deviations

• Largely in line but effective tax rate higher-than-expected.

Dividend

• None.

Highlights

Stronger sequential 3Q on loans growth, transactional fee income, trading income, Islamic income and lower provision.

However, the above was p artly offset by higher net insurance loss and overheads. Coupled with additional provision for “group” (a group consisting of companies in construction and shipbuilding) impaired loans , its FY14 ROE KPI has been lowered to 13 -14% vs. 14% previously and HLIB’s forecast of 13.5%. Note that without this “group ” provision, total provision would have been lower sequentially (or qoq earnings would have been stronger).

Overall asset quality deteriorated mai nly due to this “group” loan in its Malaysia operations . However, we were given to understand that this is case specific (due to delay in work progress) and not systemic. Moreover, the situation is not expected to deteriorate further as the “group” is ex pected to complete its orderbook and has secured additional contracts.

As for BII, it does not expect the recent interest rate and fuel price hikes to have significant adverse impact. Given that the recent deterioration in the country’s asset quality was mainly from the corporate segment (particularly mining) and its focus on the consumer and SME segments, it is confident of passing on the higher liquidity cost (mitigate NIM compression) without severely impacting asset quality. Overall, it does not expect asset quality to deteriorate further.

Risks

• Unex pected jump in impaired loans , lower than expected loan growth and significant slowdown in capital market.

Forecasts

• FY14 cut by 2% to reflect the higher-than- expected tax rate, FY15-16 unchanged.

Rating

BUY

Positives

• I mproving domestic operations and expanding regional footprint , new divisions to better address competition and customer centric and new IB outfit gaining traction. DRP provides downside protection while giving additional boost (fro m the discount pricing of DRP) to industry leading dividend yield.

Negatives

• DRP will drag ROE, recent deterioration in Indonesia asset quality (but BII is only ~7% of profit).

Valuation

• Target price reduced to RM11.29 (vs. RM11.47) based on Gordon Growth with ROE of 13.8% and WACC of 9.5%.

Source: Hong Leong Investment Bank Research - 27 Nov 2014