Highlights

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

• FY15 11% ROE KPI (excluding exceptionals or restructuring costs) is stretched but achievable as long as there is no significant deterioration on economy and sentiment in 2H.

• RM443.3m MSS cost will be recognized in 2Q and 3Q. As for the cost saving (RM291.6m per annum), bulk (90-95%) will be reflected in 4Q15. Most of the MSS is operational with limited impact on sales and revenue.

• Of the T18 target of RM400-600m cost down, RM500m has been achieved (RM200m from regional IB rationalization and RM300m from MSS) but management is striving to achieve the remaining RM100m by FY15 via other initiatives like procurement.

• Revenue wise, net interest income is expected to grow by mid-to-high single-digit despite slowdown in loans growth and erosion in NIM. While competition for deposits is still keen, it has stabilized. Although NIM is still under pressure, unlikely to repeat the sharp qoq contraction suffered in 1Q.

• Non-interest income is mixed with equity still subdued while bond, treasury and forex are performing better.

• Asset quality is intact in Malaysia. Although Indonesia and Thailand are still facing the same issue (i.e. commodities related corporate), there are no signs of significant new emergence. That said, provision in Niaga will remain elevated in 2Q (albeit lower than 1Q) and to only improve slightly in 3Q and 4Q.

Catalysts

• Gaining more traction in cost rationalization or T18 initiatives, better than expected non-interest income growth, turning into an APAC universal bank 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, as we are projecting FY15 ROE of 10.4% vs. KPI of 11%, pending results scheduled for 28 Aug. Moreover, as FY15 is expected to be another washout year, the prospects for FY16 and beyond is more pertinent.

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 RM6.02 based on Gordon Growth with ROE of 11% and WACC of 10%.

Source: Hong Leong Investment Bank Research - 22 Jul 2015