Period    3Q13/9M13

Actual vs. Expectations  The 9M13 PAT of RM1,238.8m was within the consensus forecast (74%) and that of ours (73%). However, the 3Q13 PAT of RM393.6m was 1% weaker on a sequential basis due to the one-off RM45.6m acquisition expenses. 

Dividends   No dividend was proposed during the quarter.

Key Result Highlights  The 3Q13 net interest income grew 1.1% QoQ but fell 0.7% YoY to RM524.2m. QoQ, the net interest margin was squeezed by 4bps to 2.56% while there was just a moderate 1.3% loan growth in 3Q13. The marginal NIM compression was due to portfolio rebalancing as well as the loan replacement cycle.

 The group has maintained its tactical strategy in focusing on growing its targeted segments and has made steady progress in rebalancing its loans and deposits portfolio with its loans growing by 9.2% YoY to RM83.3b vs. our forecast of 13%. The fastestgrowing segments were still Business loans (+10.7% YoY) and Corporate loans (+18.5% YoY). Consumer loans grew only +6.1% YoY due to the stricter Responsible Finance guideline and regulatory reforms. Deposits meanwhile grew 11.4% YoY, above our expectations of 9%, which led to a 160bps increase in the LDR to 91.8% vs. 88.7% in 2Q13. The total deposit of RM87.0b consisted of 17.7% CASA. 

 Overall, we note that trading and fee incomes were weak due a tough capital market during the quarter. However, the strong RM553.7m non-interest income (+14.5% QoQ) was due to the incorporation of Kurnia's earnings and made up 51% of the total income. 

 Gross impaired loans held at RM1.7b with the gross impaired ratio improving to 2.04% (from 2.22% in 2Q13). Loan loss coverage meanwhile hit a high at 123.5%. The group reported loan loss charges of RM51.5m or a credit charge of 6bps for the quarter. 

 Operating expenses were higher on one-off acquisition expenses but excluding this, it was well managed with the cost-to-income ratio standing at 44.2% in 3Q13 (vs. 43.5% in 2Q13 and 40.6% in FY12). This is within our expectations of 45%.

 In summary, the achieved 9M13's 14.2% ROE (annualised) was in line with management's guidance. This is within our expectations of 15%.

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% and a ROE target range of 14%-15%. The 9.2% Core Capital Ratio will enable the group to support a conservative 40%-50% dividend payout ratio. 

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 22.6% (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