Results

• 2QFY15 net profit of RM139.4m (+363.3% qoq; +29.8% yoy) took 1H net profit to RM169.5m (-32.2% yoy) and only accounted for 34.4% and 34.2% of already lowered (since 1Q disappointing results) HLIB and consensus full year forecasts, respectively, below expectations.

Deviations

• In addition to the one-off provisioning of its commercial banking arm in 1Q, 1H margin was below expectations while although it benefited from CA write-back in 2Q, IA continued to be elevated with gross IL ratio deterioration for the second consecutive quarter to highest since 3QFY13.

Dividends

• None.

Highlights

• 2QFY15 results were supported by continued loans growth, qoq NIM recovery, lower overheads and lower provision but partly offset by lower non-interest income.

• Silent on its FY15 KPIs (ROE of 8% and EPS of 33 sen) despite 1HFY15 ROE of 2.1% and EPS of 8.7sen.

• Asset quality (AQ) deteriorated with absolute impai red loans (IL) amount increased by 8.4% qoq (vs. 6.3% in 1Q), worst since 1Q12. IL ratio deteriorated to 2.04% (vs. 1.96% in 1Q), worst since 3Q13. More importantly, 2Q provision was helped by CA write-back while IA remained elevated despite no mention of one-off provisioning and/or “spring cleaning”.

• Thus, IA could remained elevated and drags earnings as well as rekindles concerns about delinquency 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

• FY15-17 forecasts cut by 11.6-14.7% to reflect lower NIM as well as higher provision (given continued AQ deterioration).

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.
• Lowest NIM and 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 with lower target price of RM1.96 based on Gordon Growth (ROE at 7% and WACC at 9.3%) in view of concerns about governance and asset quality.

Source: Hong Leong Investment Bank Research - 18 Aug 2015