Highlights

• We attended a group meeting with management yesterday and below are the main salient points.

• The company will be undertaking “spring cleaning” in 4QFY14 (results scheduled to be released on 17 Feb) which suggests that FY14 results will be a washout. It will be taking a more aggressive stance in impairment test on loans to strengthen its asset quality, which will result in significantly higher provisions and would take its loan loss cover from 74% as at Sep 14 to more than 80%.

• Some of this spring cleaning would flow through to 1Q15 but the amount is expected to be lower than 4Q14. Thereafter, it will be very comfortable with asset quality and hence, 1Q15 is expected to be the weakest quarter in FY15. It has also undertaken stress test on its O&G book (3.5% of total loan) at US$50/bbl and is comfortable with the asset quality.

• FY15 expected to be another weak year for capital markets. Thus, focus will be on cost management amid less sanguine top line growth expectations to drive earnings. Will reveal details of its initiatives (internal reorganization and rationalization) to drive efficiency during 4QFY14 results briefing.

• On recent intensified competition for deposits, main reason is the new liquidity framework which will be effective in Jun 15. Expects margin under pressure in 1H15 as the chase for liabilities expected to stabilize only by Jun 15. Thereafter, expects asset re-pricing to reflect the generally higher level cost of funding.

• On the failed merger attempt, given several concerns (Indonesia outlook, APAC regional franchise performance and 1-2 lumpy loans) amid the drastic change in operating environment, decided to negative the headwinds separately, rather than with the additional burden of integration.

Catalysts

• Gaining more traction in cost rationalization, better than expected non-interest income growth, turning into an APAC universal bank and more active capital management.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income if there is a slowdown in capital markets.

Forecasts

• Unchanged, pending 4QFY14 results and FY15 KPIs (to be announced on the same day) but with downside bias.

Rating

• TRADING BUY

Positives

• Proxy to economic growth and capital markets aswell as growing regional universal bank platform and the new core banking system (1Platform).

Negatives

• Impact on non-interest income if capitalmarkets soften and impact on asset quality from higher Indonesia interest rate.

Valuation

• Target price maintained at RM6.63 (Gordon Growth with ROE of 12.4% and WACC of 10.3%).

Source: Hong Leong Investment Bank Research - 22 Jan 2015