Results

• 2QFY15 net profit of RM1,584.5m (-6.8% qoq; +0.6% yoy) took 1HFY15 net profit to RM3,284.9m (+3.4%) or accounted for 46.3% of HLIB and 47.5% of consensus forecasts, below expectations.

Deviations

• Lower than expected NOII and higher than expected overheads. While 1HFY15 credit charge is in line with our assumption, FY15 guidance is higher.

Dividend

• Single-tier interim dividend of 24 sen (vs. 24 sen) of which 20 sen is under DRP and 4 sen cash.

Highlights

• Despite continued strong loans growth of 3.5% qoq and 15.6% yoy, 2Q net interest income was partly offset by lower NIM. This was further dragged by lower NOII (MTM loss, lower trading income and impairment loss on financial investments), higher overheads and higher provisions (due to asset quality deterioration in Indonesia and Singapore). Associate contributions higher mainly from MCB Bank (Pakistan) while An Binh Bank (Vietnam) was slightly lower.

• Asset quality deteriorated, mainly in Indonesia and Singapore (the latter from specific accounts) which more than offset continued improvement in Malaysia. As a result, credit charge was highest since 3Q13.

• With 1H ROE of 12.1% falling behind KPI of 13-14% as wel l as the signi ficant change in operating and economic envi ronment, management has lowered its FY15 KPIs. It is now targeting ROE of 12-13% (vs. 13-14%) and loans growth of 8-9% (9-10%) but higher deposits growth of 10- 11% (9-10%) as more focus will be on liquidity and funding cost (albeit under competitive pressure).

• The new ruling on R&R loans will have some negative impact on asset quality but less than 1%. Thus, it is guiding credit charge at 30-32bps (vs. 27bps in 1H).

Risks

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

Forecasts

• FY15-17 cut by 8.4-10% (less than 12% ROE vs. KPI of 12- 13%) to reflect 1H deviations and lowered KPIs.

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, deterioration in Indonesia asset quality (but BII is only a small contributor of profit ) and drag from subdued capital markets.

Valuation

• Target price cut to RM10.27 (vs. RM11.30) based on Gordon Growth with ROE of 11.7% and WACC of 8.8%. Despite that, maintain Buy call as valuation now more compelling with attractive yield.

Source: Hong Leong Investment Bank Research - 28 Aug 2015