Highlights

• We attended a group meeting with management yesterday and below are the main salient points.

• Overall, 11% ROE KPI intact (excluding exceptionals or restructuring costs) as 1Q is on track.

• Most of the discussions were centered on asset quality. Clarifying the situation in Niaga, the main issue is in coal and coal related segment and thus far, there is no indication of spill over to other segments. Although provision will stay elevated in 2Q (but lower than 1Q), it is to address the 40% NPLs in coal and coal-related book which has been stable over the last few months. More importantly, there is no significant deterioration that could create a second wave of high provision beyond those for the coal and coal related.

• No issues in Singapore and Thailand while stringent stress tests in Malaysia (oil at US$40 and CPO at RM1,300) show no impact on provisions for the O&G, plantation and steel sectors. In addition, there are also no material risk in Malaysia’s GLCs, SMEs and retail segments.

• In terms of T18 structural cost down initiatives, it has achieved 70-80% of the targeted 30% cost down in IB which will complete by 2Q. Others will complete by end of FY15. One-off related costs will skew run rate but post FY15, cost base will be lower by RM400-600m.

• In terms of business segments, wholesale equity is still weak but better than FY14, treasury better due to volatility in bond and forex markets as well as higher issuance, corporate banking still muted but with decent growth, retail also has decent growth but somewhat impacted by higher cost of funds and SME is tracking in line.

• No extra benefits to switch to bank holding structure while new classification for rescheduled and restructured loans no impact on provision.

Catalysts

• More traction in T18 initiatives, high provisions taper off, better than expected non-interest income growth, regional platform and more active capital management.

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

• Unchanged, pending 1QFY15 results slated for 20 May.

Rating

HOLD

Positives

• Proxy to economic growth and capital markets as well as growing regional universal bank platform, new core banking system (1Platform) and new T18 initiatives.

Negatives

• Impact on non-interest income when capital markets soften, impact of asset quality deterioration in Indonesia and legacy high cost structure.

Valuation

• Target price maintained at RM6.32 (Gordon Growth with ROE of 11.3% and WACC of 10%).

Source: Hong Leong Investment Bank Research - 28 Apr 2015