Results

• 2QFY15 core net profit (excluding RM316m and tax effect of RM79m on MSS) of RM877m (+12.1% qoq; -7.7% yoy) took 1HFY15 core net profit (also excluding RM202 IB restructuring cost in 1Q) to RM1,659m (-17.7%) or accounted for 41.3% and 44.8% of HLIB and street, respectively, below expectations.

Deviation

• Higher than expected provision (78bps annualized credit charge vs. our 45bps assumption). Partly offset by higher than expected NOII (but guidance that the strong 2Q NOII is unlikely to repeat).

Dividends

• None.

Highlights

• Other than the elevated provision (mainly from Niaga), 2Q results were also dragged by lower NIM and the RM316m MSS cost (overheads level). On the other hand, these were partly offset by continued strong loans growth and relatively strong NOII (flat qoq but up more than 30% yoy) as well as the RM79m tax effect on MSS.

• Asset quality deteriorated mainly reflecting the challenging envi ronment faced by Niaga and to some extend Thailand while Malaysia continued to improve. In terms of guidance ahead, provision in Niaga has peaked but to remained elevated (albeit provision to improve gradually qoq). As for asset quality, it is highly dependent on the Indonesia economy. Thailand is expected to improve in 2H while the group is still very comfortable with Malaysia.

• While bulk of restructuring costs accounted for, we understand that remaining RM127m (total cost of RM443m minus RM316m in 2Q) would be book in 3Q. Coupled with elevated provision and guidance of non-repeatable 2Q NOII, 3Q results could remain under pressure.

• Management not overly concerned about potential MTM loss given that most are hedged. As for liquidity, it is comfortable with its own position while believe system liquidity still ample.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income i f there is a slowdown in capital markets.

Forecasts

• FY15 forecast cut by 21% to reflect continued elevated provision while FY16-17 adjusted marginally.

Rating

• HOLD
• Positives- Proxy to economic growth and capital markets as well as 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 cut to RM5.52 (vs. RM6.02 previously) based on Gordon Growth with ROE of 11% and WACC of 10.4%.

Source: Hong Leong Investment Bank Research - 1 Sep 2015