Results

• 4QFY14 net profit of RM208.6m (+44.5% qoq; +25% yoy) took FY14 to RM605.3m (-6.9% yoy) or accounted for 109.5% and 110.2% of HLIB and consensus full year forecasts, respectively, above expectations.

Deviations

• Mainly due to provision write-back (highest quarter) arising from significant jump in 4Q recovery. As a result, FY14 continued to register write-back for the fourth consecutive year, albeit lower write-back yoy.

Dividends

• None, already paid interim single-tier dividend of 15 sen (in line with its policy of 50% payout).

Highlights

• 4QFY14 results were mainly boosted by provision writeback (which in turn was due to significant recovery), continued loans growth, higher NIM and sequentially lower overheads. This was partly offset by sequentially lower noninterest income.

• FY14 ROE of 8.4% missed its KPI of 9.2% mainly due to merger integration costs and lower NIM.

• For FY15, management has set KPIs (ROE of 8% and EPS of 33 sen). We believe this is more realistic in view of the challenging operating environment. HLIB’s FY15 forecast is largely in line with the KPIs.

Risks

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

Forecasts

• The significant high recovery in 4QFY14 unlikely to repeat. Coupled with less sanguine FY15 KPIs, we only fine-tuned our FY15-16 forecasts (post FY14 final results) without significant changes.

Rating

HOLD

Positives

• Improving asset quality and Tier-1 capital purely equity while acquisition of Hwang enhanced 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 RM66bn (circa 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 franchise (CASA only 20% of total) and one of the highest percentage of fixed rate loans.
• Short-term drag and dilution from acquisition of Hwang (transaction and integration costs) and the subsequent rights issue to fund the acquisition.

Valuation

Maintain HOLD. Target price raised to RM2.93 (vs. RM2.90 previously) based on Gordon Growth with ROE at 8% and WACC at 9.3%.

Source: Hong Leong Investment Bank Research - 27 Feb 2015