Results

• 4QFY14 net profit of RM200.3m (-77.5% qoq; -80.7% yoy) took FY14 to RM3,106.8m (-31.6% yoy; -24.6% yoy if exclude all exceptional items) or only 81.4% and 80.4% of HLIB and street, respectively, below expectations.

Deviation

• High provision which more than doubled qoq and additional exceptional items (net drag of RM52m).

Dividends

• Single-tier second interim of 5 sen, taking FY14 to 15 sen or 40.7% payout, in line with 40% policy.

Highlights

• Results mainly impacted by jump in provision in Indonesia and IB (lower volume and lower ECM deal flows). 4Q jump in provision mainly from Indonesia and one legacy account in Malaysia (the latter fully provided).

• Given challenging outlook, has set FY15 KPIs at 11% ROE, 10% loans growth, 40-50bps credit charge, <55% CIR, >10% group CET1 and 40% dividend payout. Main focus is T18, particularly cost rationalization.

• 1QFY15 still high provision but lower than 4QFY14 and normalized post 1QFY15.

• T18 - two prong focus on cost and efficiency optimization (closing, scaling down and right sizing) and accelerating key growth drivers (digital consumer, SME and transaction).

• To achieve 15% ROE target, 100-200bps cost (cut of RM400-600m or 5-7%/year), 100-150bps key growth drivers and 30-60bps capital management.

• Reorganization to enable growth drivers and synergies.

• Australia closure plus another 50 headcount across selected APAC markets mean circa half of the announced targeted 30% APAC IB cost reduction in 2015. Other initiatives targeted to complete in 2015 and will continue thereafter.

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

• FY15-16 forecasts cut by 6-10% to reflect latest KPIs.

Rating

HOLD

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 Indonesia operations.

Valuation

• Target price lowered to RM6.32 (vs. RM6.63) based on Gordon Growth with ROE of 11.3% and WACC of 10%.
• Cut to Hold (vs. Trading Buy) as share price has jumped 17.8% from recent low of RM5.05 (in less than two months). While we remained positive about the spring cleaning and T18 on longer term asset quality and business model, we envisaged short-term weakness in share price and would only revisit our rating at lower levels.

Source: Hong Leong Investment Bank Research - 2 Mar 2015