The group's 1QFY13 results were in line with both consensus and our full-year forecasts. Given its immediate focus on managing costs and sustaining balance sheet liquidity rather than aggressive growth, the group's immediate term earnings growth is unlikely to materially surprise on the upside. Meanwhile, itsefforts to realize meaningful revenue synergy are now likely to unfold over a longer horizon up to 2015, while its immediate term ROE may dip slightly below management's 16%-17% target for FY13. We maintain our NEUTRAL call and RM14.57 FV (2.1x FY13 PBV, ROE: 15.8%).
In line. HLBank's annualized 1QFY13 earnings, which made up almost 100% of both consensus and our forecasts, increased 19.5% y-o-y, reflecting the maiden adoption of MFRS139. This also incorporated a comparable restatement of the 1QFY12 provisions on full MFRS139 adoption, which led to collective assessment dipping from 2.1% to 1.6% (and restated to 1.7% for FY12). Pre-operating provision profit, meanwhile, surged 21.7% y-o-y and 14.2% q-o-q on the back of: (i) a 61.5% y-o-y boost in non-interest income due to higher dividend income and sale of investment securities, and (ii) stronger recovery vis-''-vis allowance for loan impairments, resulting in a net write-back in provisions. However, note that earnings got a boost from unsustainable lumpy trading gains and provision write-backs and recoveries in 1Q13. Elsewhere, core net interest income declined 1.8% q-o-q and 3.2% y-o-y as net interest margin pressure persisted. Adjusting for the lumpy trading gains, the group's pre-provision operating profit would have perked up at a much milder 6.7% y-o-y.
NIMs compression offset by better operating efficiency. Net interest margins (NIMs) dipped 21bps q-o-q to 2.13% due to continued pressure on new loans pricing, with the loans-to-deposit (LDR) ratio largely retained at 74.3%. However, this negative effect on profit was offset by the surge in lumpy trading gains from its investment securities portfolio, which helped to pare down its cost-to-income (CIR) from 49.3% to 43.3%. the improvement in provisioning trend was driven by lower collective assessments as a result of MFRS139 adoption as well as recoveries. With its absolute gross impaired loans declining 10.9% q-o-q, the increase in collective assessment lifted the group's provision cover from 149% to 158% q-o-q.
Overall asset quality firm. In terms of key asset quality, the group fared relatively well in: (i) managing its credit quality despite inheriting a lower credit quality from EON Cap's portfolio, as reflected in the impressive 3.4% q-o-q decline in absolute impaired loans. This led to a further improvement in the gross impaired loans ratio to 1.6% from 4Q12's 1.7%.
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Loans growth sustaining but still below industry trends. The group saw a sequential recovery in loans growth (1.3% q-o-q) vs 4Q12's 3.4% q-o-q growth. Its 1QFY13 loans came in at RM91.8bn, growing by a mere 7.7% y-o-y, while mortgages performed even less favourably, ticking up 2.3% q-o-q. Business loans inched up only by 0.6 % q-o-q due to the repayment of certain lumpy trade financing loans, while auto loans growth was rather flat q-o-q as largely expected. The key growth segment is loans and financing for the purposes of mergers and acquisitions, which doubled to RM608m, but still remained a very small proportion of the group's loan portfolio. A key focus of the group's revenue synergy targets is greater emphasis on business and SME banking, as it has designated up to 51 business banking branches.
Impact of MFRS139. The adoption of MFRS139 will have the effect of releasing RM284m in excess collective assessment into retained earnings, which will in turn boost the group's core tier 1 equity capital ratio by 30bps to 8.4%. There were initial concerns that the group's borderline 8.1% Basel III CET1 ratios prior to the current write-back of its excess collective assessment could potentially result in capital raising overhang if BNM imposed the maximum 2.5% counter-cyclical buffer over and above the minimum 7.0% required by Basel III. However, with the current one-off excess CA write-back of RM284m and assuming an annual dividend payout ratio cap of 40%, the group would be able to meet the most stringent minimum CET1 capital ratio of 9.5% by FY18, by which time we estimate its CET1 to be approximately 9.4% to 9.6%.