Results

• 3QFY15 core net profit of RM126.4m (-23% qoq; -7.4% yoy) took 9MFY15 (excluding RM21.6m profit from sale of land, RM10m Banca fee amd RM10.6m MSS) to RM416m (+4.7% yoy from 9MFY14 excluding RM30m sign-on fee from Manulife and one-off VSS of RM22.3m) or accounted for 70.2% and 70.8% of HLIB and consensus forecasts, respectively.

Deviations

• We considered the results to be in line as continued strong loans growth (+16.3% yoy) and its sustained deposits growth (+13% yoy) with only 5-7bps yoy impact on cost of fund, should sustained sequential earnings. Moreover, 3QFY15 was impacted by significant jump in Collective Allowance (CA) arising from loans growth and migration of credit ratings.

Dividend

• None.

Highlights

• Positives from 3QFY15 are continued strong loans and deposit growth (with CASA sustained at circa 35%) as well as lower sequential overheads. Negatives are lower NIM, lower trading gain and the above mentioned significant jump in provision (mainly from CA).

• Although LDR has inched to 85%, it will retain the target of 85%, implying potential slower loans growth ahead, given the current intense deposits competition. However, the company will continue with its strategy of maintaining its strong deposit franchise (especially given its niche in the consumer and SME segments) and ensuring assets efficiency in terms of booking loans.

• Asset quality – impaired loans ratio continued to improve. Moreover, despite strong double-digit loans growth, absolute impaired loans also declined qoq.

• No reasons or indications to change dividend policy of up to 60% while long-term ROE target of 15% is achievable (albeit taking longer time in view of recent challenging developments).

Risks

• Unexpected jump in impaired loans and lower than expected loan growth. Intense competition from much bigger players.

Forecasts

• Unchanged.

Rating

BUY

Positives

• Strong asset quality and deposit franchise (thelatter helps in protecting NIM), strong niche in consumer and SME, potential M&A excitement and ample room for more active capital management given its robust capital. Transformation has resulted in strong loans growth.

Negatives

• Stiff competition from significantly larger playerswith bigger scale and reach as well as relatively lower liquidity against peers.

Valuation

• Target price maintained at RM5.25 based on Gordon Growth with ROE of 14.2% and WACC of 10.3%.

Source: Hong Leong Investment Bank Research - 17 Feb 2015