Results

• 1QFY15 net profit of RM467.3m (-2% qoq; +5.7% yoy) accounted for 21.9% and 22.7% of HLIB and consensus forecasts, respectively.

Deviation

• Largely in line as 1Q was 19.5-22.1% of FY13-14.

Dividends

• None.

Highlights

• 1Q yoy results underpinned by continued strong 13.7% yoy loans growth (despite one lumpy repayment of RM2.1bn) as well as higher non-interest income and lower provisions but partly offset by higher overheads and lower NIM.

• Qoq dragged by lower NIM, lower non-interest income and higher provision but partly offset by lower overheads.

• 1Q is behind FY15 KPIs but no changes to the target and it aims to catch up via non-interest income and cost containment. IB pipeline is strong and expected to flow through in 2Q and 3Q with potential additional income from its new regional treasury office in Singapore. It also has several cost containment initiatives and aim to achieve positive JAW by end of 2015.

• On NIM, despite expectation of continued competitive pressure, target is to limit erosion to 7-12bps via shedding more expensive deposits with CASA, replacing some subdebt at lower rate and focus on risk adjusted returns.

• Integration of RHB-OSK ahead of target and has contributed to the strong IB pipeline. Meanwhile, IGNITE 2017 is progressing well and already li fted PBT by RM68m. This transformation is expected to gain further momentum for the rest of 2015.

• Impaired loans increased qoq (but ratio flat) largely due to four specific SME accounts which were impai red but with limited provisions. Management assured they are specific and has not seen systemic risk.

• Rights issue to complete by end 2015 while LCR is above minimum requirement.

Risks

• Unexpected jump in impai red loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

• Unchanged.

Rating

BUY

Positives

• Valuations still lagging behind; OSK merger and IGNITE 2017 transformation already bearing fruits, reflected in strong loan growth and improving asset quality and strong IB performance; “Easy” and tie-up with Pos M’sia as well as Bank@ Work added different growth dimension.

Negatives

• Low liquidity, ROE at lower end among peers and EPS dilution from rights issue.

Valuation

• Target price maintained at RM9.19 (Gordon Growth with ROE of 11% and WACC of 10.5%).

Source: Hong Leong Investment Bank Research - 1 Jun 2015