Results

• 1QFY15 net profit of RM30.1mm (-85.6% qoq; -78.9% yoy) only accounted for 4.7% and 4.8% of HLIB and consensus full year forecasts, respectively, below expectations.

Deviations

• Mainly due to one-off provisioning of its commercial banking arm. However, the company expects the commercial banking arm to be back on track in the sequent quarters of FY15.

Dividends

• None.

Highlights

• 1QFY15 results were dragged by slowdown in loans growth (to 5.9% yoy and suffered 1.1% qoq contraction), sharp plunge in NIM, continued rise in overheads and the one-off provision. These were partly offset by higher non-interest income.

• Silent on its FY15 KPIs (ROE of 8% and EPS of 33 sen) despite 1QFY15 results (ROE of 1.5% and EPS of 1.5 sen) fell short.

• Asset quality (AQ) deteriorated with absolute impaired loans (IL) amount increased by 6.3% qoq. Combined with slower loans growth, IL ratio deteriorated to 1.96% (vs. 1.82% in 4QFY14), worst in 5 quarters. In terms of purpose, it mainly came from construction, transport, credit cards, working capital and others. The deterioration could rekindle investors’ concerns about its delinquency track record, especially with double-digit loans from 4Q08 to 4Q12.

Risks

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

Forecasts

• FY15 forecast cut by 20.2% to reflect the one-off provision in 1QFY15. FY16-17 forecasts remained unchanged.

Rating

HOLD

Positives

• Tier-1 capital purely equity while 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 half of the next largest bank, AMMB.

Negatives

• Investors’ perception and its delinquency track record.
• One of the lowest NIM among peers, lowest ROE in industry, low deposit franchise (CASA only circa 20% of total) and one of the highest percentage of fixed rate loans.
• Short-term drag and dilution from acquisition of Hwang (transaction and integration costs) and the subsequent rights issue to fund the acquisition.

Valuation

• Maintain Hold and target price of RM2.93 based on Gordon Growth with ROE at 8.1% and WACC at 9.4%. We believe valuation below book is reflective of AQ track record.

Source: Hong Leong Investment Bank Research - 21 May 2015