Period     1Q13/3MFY13

Actual vs.  Expectations     The 1QFY13 PAT of RM357.2m was below the consensus forecast (18%) and that of ours (18%), dragged down by the higher than expected loan loss charges of RM150.6m (+68.8% QoQ). 

Dividends    No dividend was announced.

Key Result Highlights   The loan book stood at RM113.6b, growing strongly by 1.9% QoQ (or 18.9% YoY vs. our lower estimate of 15.0%) due to the strong growth in Corporate & Investment lending. The net interest margin (NIM) was steady at 2.34% (4Q12: 2.35%) with the net interest incomes of RM778.9m staying relatively healthy on both a QoQ and YoY basis (at +0.6% and +9.9% respectively). The slight NIM compression was due to a lower asset yield due to continuous re-pricing despite a higher 83% L/D ratio (from 81% in 4Q12), which did offer some cushioning effects. 

The 1Q13 non-interest incomes meanwhile came in at RM450.1m, down marginally by -0.5% QoQ.  The total revenue of RM1,362.7m was unexciting since it was pretty flat at -0.2% QoQ.  However, it was +18.4% higher on a YoY basis due to the merger between RHB and OSK IB. The total cost of RM718.4m was only +0.2% higher on a QoQ basis with the cost-to-income ratio rising to 52.7%, above our forecast of 44%. 

The higher-than-expected credit charge-off rate of 55bps was the major disappointment during the quarter. The group has a single account carrying a RM100m loan exposure which turned impaired during the quarter, causing the group to provide an extra RM68m in provisions. The annualised charge ratio of 55bps was higher than our expectation of 40bps. As a consequence, the annualised FY13 ROE of 9.3% was below our expectations.

Outlook    During the briefing, the group maintained its 2013 KPI target with a ROE of 13%. We believe the group should be able to achieve its full year ROE target of 13% judging by its determination in extracting synergies from its merger with OSKIB and containing its cost-toincome ratio to 50%. The group is also well-positioned for a 15% loans growth in the near future with the focus on growing its ASB financing, SME and Corporate loans.  However, the group is now guiding for a higher credit cost assumption of 35bps for FY13 as against the previous KPI target in the range of 25-30bps. 

Change to Forecasts    We are maintaining our PAT estimate of RM1,951.0m for FY13 and RM2068.4m for FY14.

Rating  Downgrade to MARKET PERFORM.

Due to the limited upside, we have downgraded the stock to a MARKET PERFORM rating from an OUTPERFORM previously.

Valuation     We have rolled forward our valuation year to FY14 and adjusted upwards our target price to RM9.20 (from RM8.30 previously) based on an unchanged targeted P/BV of 1.3x over its FY14 BV of RM7.09.  

Risks    Tighter lending rules and a margin squeeze.

Source: Kenanga