Period    2Q13/1H13

Actual vs. Expectations    The 1H13 PAT of RM845.2m was within the consensus forecast (51%) and that of ours (50%). However, 2Q13's PAT of RM396.6m was 4% weaker on a sequential basis.


Dividends    Declared a single tier interim dividend of 7 sen.


Key Result Highlights    The 2Q13 net interest income grew 0.6% QoQ but fell 1.2% YoY to RM518.7m. QoQ, the net interest margin was squeezed by 11bps to 2.59% while there was just a moderate 2.7% loan growth in 2Q13. The severe NIM compression was due to the ongoing competition, portfolio rebalancing as well as loan replacement cycle.

We note that non-interest income was weak as well mainly due to the volatile equity market and flattening
yield curve in the debt capital market. The non-interest income of RM483.7m (-12.0% QoQ), however, still
contributed 52% of the total income.

The group has maintained its focus on growing its targeted segments and had made steady progress in
rebalancing its loans and deposits portfolio with its loans growing by 10.5% YoY to RM80.8b. The fastest
growing segments were still Business loans (+14.6% YoY) and Corporate loans (+26.4.0% YoY).

Consumer loans grew only +4.9% YoY due to the stricter Responsible Finance guideline. Deposits meanwhile grew 12.3% YoY. The total deposits of RM91.3b consisted of 15.8% CASA. The stronger deposit growth in 2Q13 has led to a 100bps cut in the LDR to 87.8% vs. 88.8% in 1Q13.

Gross impaired loans held at RM1.8b with the gross impaired ratio improving to 2.22% (from 2.38% in
1Q13). Loan loss coverage meanwhile hit a high at 121.8%. The group reported loan loss charges of
RM14.3m or a credit charge at 7bps for the quarter.

Operating expenses were well-managed with the cost-to-income ratio stood at 43.8% in 2Q13 (vs. 41.1% in 1Q13 and 40.6% in FY12).

In summary, the achieved 1H13's 14.7% ROE (annualised) was in line with management's guidance.

Outlook    The group is maintaining its medium-term aspiration (FY13-15) to grow its PAT in the 9%-12% (CAGR) range with a loan growth target of 8%-9% as well and a ROE target range of 14%-15%.

The 8.6% Core Capital Ratio will enable the group to support 40%-50% dividend payout ratio. Based on our dividend estimates, the stock currently offers >4.0% in net dividend yield.


Change to Forecasts    We are maintaining our FY13E PAT forecast of RM1,697.6m and FY14E PAT forecast of RM1,902.0m.


Rating    MAINTAIN OUTPERFORM

Our target price ('TP') implies a potential total return of 20.6% (together with a 4.8% net div yield).


Valuation    Maintaining our TP at RM7.40 based on 1.7x FY14 book value of RM4.38. The TP implies a 11.7x FY14 PER.


Risks    Tighter lending rules and a margin squeeze.

Source: Kenanga