Highlights

• Salient points from analyst briefing on 4QFY14 results.

• Already announced FY15 KPIs of ROE 8% or EPS 33 sen earlier. Although it is still targeting loans and profit growth of 10% and more than 10% (5-6% more realistic given current challenging environment), respectively, the lower ROE target (vs. 8.4% in FY14) was premised on enlarged capital (post rights issue for the acquisition of Hwang), competitive pressure (on IB and NIM) and continued Affin Hwang integration costs. Partly offset by absence of one lumpy impaired loan (circa RM30m but has already fully provided for) with normal credit charge run rate of 15-20bps. HLIB’s forecast is largely in line, thus, no change to our forecasts.

• Merged Affin Hwang IB has set 2019 targets at #5 IB (revenue and ROE), #3 institutional securities trading value, #1 retail securities trading value and volume, #3 asset manager with top quartile performance and introduce wealth management by 2016. While there are various strategic initiatives, these will be focused around three approaches (broaden sourcing funnel, strengthen IB advisory team and extend distribution access).

• In terms of synergy benefits, it is maintaining RM84m (RM32m revenue, RM79m cost and –RM25m “dissynergies” or overlapping for FY15-17 (bulk in FY16-17) and RM43m from FY18 onwards. FY15 will still have integration cost of more than RM30m (vs. RM29.6m in FY14) vis-à-vis early guidance of RM54m total (over 12-18 months).

• We reiterate our neutral stance on the M&A. While there is room for synergies, near-term prospects unexciting given intense competition amid slowdown in IB related activities as well as dilution to EPS, ROE and capital ratios.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD

Positives

• - Improving asset quality and Tier-1 capital purelyequity, 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 delinquency trackrecord, one of the lowest NIM, ROE and deposit franchise (CASA only 21% of total) but highest percentage of fixed rate loans among peers and Short-term drag and dilution from acquisition of Hwang (transaction and integration costs) and the subsequent rights issue to fund the acquisition.

Valuation

• Target price maintained at RM2.93 based on Gordon Growth with ROE at 8% and WACC at 9.3%.

Source: Hong Leong Investment Bank Research - 10 Mar 2015