Results

• 2QFY15 net profit of RM524.6m (+10.1% qoq; -5.7% yoy) took 1HFY15 net profit to RM1,000.9m (-0.6%) or accounted for 46.1% and 48% of HLIB and consensus forecasts, respectively.

Deviation

• Lower than expected NIM which fell 9bps qoq in 2Q (guiding for lower magnitude of compression ahead, or circa half of 2Q decline) and NOII despite one-off CA write-back (ex the one-off, 19bps normalized credit charge in line with HLIB). Absence of CA write-back also implies higher provisioning ahead and we expect 2H credit charge to track closer to our assumption.

Dividends

• None.

Highlights

• 2Q results boosted by RM131m CA write-back arising from refinement on mortgage portfolio. Otherwise, slower loans growth was further dragged by lower NIM, lower NOII and higher overheads (albeit run rate lower than previous years).

• 1H results behind FY15 KPIs, target ROE of more than 11.5% challenging, 10-11% more achievable given the recent change in operating and economic environment.

• Asset quality deteriorated mainly from business segment with circa half of the impaired loans without losses. They are account specific with no portfolio deterioration. Still aiming for impaired loans ratio to improve to 2% from 2Q’s 2.05%.

• Shareholders approved rights and reorganization proposal. Price fixing end this week. It reiterates positive impact with proforma ROE to improve from 10.9% to 11.5%.

• Reframed strategy to focus more on performance and profitability over size and revenue. It has set a target ROE of 13% in 2017 and 15% in 2020 anchored on 3 key broad themes. The 36 initiatives under IGNITE 2017 have been sharpened to 17 which enables the group to be more focused on delivering IGNITE 2017.

Risks

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

Forecasts

• FY15-17 cut by 9-9.8% to account for the above deviations with FY15 ROE at the lower end of its “achievable target”.

Rating

• BUY
• Positives- Valuations still lagging behind; OSK merger and IGNITE 2017 transformation already bearing fruits; Bank@ Work; Rights issue and reorganization will enhance tax efficiency, eliminate goodwill, enhance interest savings as well as higher ROE and capital ratios; new reframed strategy to focus on performance and profitability.
• Negatives-Low liquidity, ROE at lower end among peers and EPS dilution from rights issue.

Valuation

• Target price cut to RM7.53 (Gordon Growth with ROE of 9.9% and WACC of 10.2%) but maintain Buy as valuation still lagged peers and below book.

Source: Hong Leong Investment Bank Research - 1 Sep 2015