Results

• 1QFY15 net profit of RM1,700.4m (-12% qoq; +6.2% yoy) accounted for 24% of HLIB and 24.5% of consensus forecasts, in line with expectations.

Deviations

• Largely in line.

Dividend

• None.

Highlights

• 1Q was underpinned by continued strong loans growth of 2.1% qoq and 14.2% yoy as well as qoq improvement in NIM (albeit lower yoy). High qoq NIM was impressive vis-àvis peers and was attributed to its strong deposits franchise as CASA grew 2.1% qoq and 11.5% yoy as well as shredding higher cost money market deposits.

• Non-interest income lower qoq but higher yoy, boosted by forex gain (partly structural or forex translation of US$ holdings) but partly offset by net insurance loss (vs. gains).

• Overheads were lower qoq but 14.8% higher yoy partly due to one-offs (higher give points expenses and staff union collective agreement ). Ex one-offs, growth would be 10.7% yoy while CIR would be within its KPI. Management reassured its commitment to tight cost discipline, especially on discretionary expenses to meet its CIR KPI.

• Although 1Q is slightly behind its FY15 KPIs of 13-14% ROE, loans and deposits growth of 9-10%, credit cost of 30bps, CIR of 47-48% and NIM erosion of 8-10bps, they remained unchanged. While it has lowered its outlook (in particular industry loans growth expectations which are lower than its KPIs) for the “home” markets of Malaysia, Singapore and Indonesia, the company will only review the KPIs during 2Q results briefing, which, by then, could provide better indication on impact from GST.

• Impaired loans amount increased qoq (although the ratio improved) mainly due to Indonesia and Singapore. The latter due to two speci fic accounts. Meanwhile, Malaysia asset quality continued to improve. Overall, it is not overly concerned about asset quality in Malaysia and Singapore.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and significant slowdown in capital market.

Forecasts

• Unchanged.

Rating

BUY

Positives

• Improving domestic operations and expanding regional footprint, new divisions to better address competition and customer centric and new IB outfit gaining traction. DRP provides downside protection while giving additional boost (from the discount pricing of DRP) to industry leading dividend yield.

Negatives

• DRP will drag ROE, recent deterioration in Indonesia asset quality (but BII is only ~7% of profit).

Valuation

• Target price maintained at RM11.30 based on Gordon Growth with ROE of 13.2% and WACC of 9.3%.

Source: Hong Leong Investment Bank Research - 29 May 2015