Results

• 4QFY14 net profit of RM486.2m (-10.7% qoq; -3.6% yoy) took FY14 to RM2,038m (+11.3% yoy) or accounted for 97.6% and 100.3% of HLIB and consensus forecasts, respectively, in line.

Deviation

• Largely in line.

Dividends

• Single-tier interim of 6 sen (all under DRP). Payout only 7.5%, significantly below policy of 30%.

Highlights

• 4Q positives – faster loans growth, higher NOII (especially corporate advisory fee) and lower provision (mainly higher recovery); negatives - lower NIM and sharp overheads jump (CIR near 60%). However, we were assured normal overheads run rate is significantly lower than 4Q.

• FY14 missed and hit half of KPIs but CASA growth of 6.4% still ahead of 4% industry mean and if excludes CA alignment, ROE would have met KPI.

• FY15 KPIs of ROE >11.5%, gross impaired loans ratio <1.8%, loans growth 10% (lower target to allow liabilities to catch up), CASA growth >10%, CIR <51% and international contribution of >13% which reflects its focus on cost (both opex and funding), risk-based pricing and capital position.

• OSK merger integration and new transformation program (IGNITE 2017) are progressing well, ahead of targets and has contributed to the commendable results.

• Low dividend payout to conserve capital amid negotiations with authority on capital at holding level with potential of cash call. Assuming post cash call (25% discount) CET1 and double leverage of 11% (vs. 9.8% now) and 120% (137%), it would need to raise RM1.5bn or a 1-for-10 issuance. Dilution to EPS, book and ROE circa 9%, 2.4% and 1.8% respectively. Target price would reduce by 6% to RM8.83, still 13.5% upside from ex price of RM7.78 vs. 14.5% currently.

• Asset quality continued to improve.

Risks

• Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

• FY15-16 fine-tuned post FY14 final results resulting in 3.5- 4.3% reduction.

Rating

BUY

Positives

• Valuations still lagging behind; OSK merger andIGNITE 2017 transformation already bearing fruits, reflected in strong loan growth and improving asset quality and strong IB performance; “Easy” and tie-up with Pos M’sia as well as Bank@ Work added different growth dimension.

Negatives

• Low liquidity, ROE at lower end among peersand dilution from cash call.

Valuation

• Post earnings cut, target price cut to RM9.19 (Gordon Growth with ROE of 11% and WACC of 10.5%) vs. RM9.28.

Source: Hong Leong Investment Bank Research - 2 Mar 2015