Results

• 1QFY15 net profit (excluding RM202m one-off IB cost management initiative expenses) of RM782.1m (+290.4% qoq; -26.6% yoy) accounted for 18.4% and 19.4% of HLIB and street, respectively.

Deviation

• This is within expectations based on earlier guidance of still elevated provision in Niaga which will impact 1QFY15 earnings.

Dividends

• None.

Highlights

• Results show good net interest income traction in regional consumer and commercial banking with overall loan growth at 2.1% qoq and 12.5% yoy. However, partly offset by lower NIM (especially from cost of fund pressure), still weak capital markets and banca regulations in Indonesia as well as the elevated provision at Niaga.

• NIM erosion guidance now at 20bps vs. 5-10bps previously. Thus, although maintaining FY15 ROE KPI of 11%, it acknowledged that the target is challenging. However, the group has expedited the cost rationalization process.

• The RM202m one-off IB cost rationalization will result in cost savings of circa RM200m per annum. This is a major step towards its T18 target of RM400-600m cost down. Thus far, the reduction of 164 staff in its regional IB platform and closure of Australia operations have not impacted income.

• MSS in Malaysia and Indonesia is another major step toward the T18 target. It expects most take-up from backroom and limited from sales force which implies limited impact on income.

• Asset quality deteriorated mainly reflecting the challenging environment faced by Niaga. The deterioration in Niaga was partly offset by improvement in all other countries.

• New rule on R&R loans has limited impact on P&L and impaired loans classifications while it is still comfortable with asset quality in Malaysia as well as the group’s capital position.

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

• FY15-17 forecasts cut by circa 5% to reflect guidance of higher than expected erosion in NIM.

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 cut to RM6.02 (vs. RM6.32 previously) based on Gordon Growth with ROE of 11% and WACC of 10%.

Source: Hong Leong Investment Bank Research - 21 May 2015