Period     2Q13/6MFY13

Actual vs. Expectations  The 1H13 net profit of RM2.0b accounted for 47% of our estimate of RM4.3b and 48% of the consensus estimate of RM4.2b. We deem this set of results inline with expectations as 1H result normally accounts for 47%-49% of the full-year number. 

Dividends    Declared a 1st interim single-tier dividend of 22sen/share  (vs. 20sen/share in 1H12), representing 39% payout  of  1H earnings. Ex-date is set on 6 August and payment date is 20 August. We maintain our full-year NDPS of 52.4sen, implying 44% payout and a net yield of 3.1%.

Key Result Highlights    Loan:  Despite the keen competition and tighter administrative measures, the Group still registered a total loan growth of 5.9% or 11.8% on annualised basis. This growth rate is pretty much inline with our growth expectation of 12%, which outperformed the industry loan’s YoY growth of 9.0% as of end-May 13. The Group’s loan growth was mainly driven by retail loans (85.9% of total loans, +12.1% YoY), of which housing and SME loans grew at higher rates at +16.6% and +20.9% YoY, respectively.  

Deposits: Again, supported by its strong retail franchise, total customer deposits grew at an annualised rate  of 13.6%, higher than the banking industry’s YoY growth of 9.2% (as at May 13), positioning the LDR at 87.1% vs. 87.7% and 88.5% in 1Q13 and 2Q12, respectively. As such, funding and liquidity position for the Group remains healthy.

Interest Income: Nonetheless, NIM continues to come under pressure. It dipped 7bps from end-Dec12 and 17bps from end-Jun12. As a result, net interest income only grew 6.6% YoY (or +2.7% QoQ) to RM1.39b in 2Q13 vs. RM1.27b in 2Q12. 

Non-interest income, which accounted for 21.8% of total income, grew 5.4% QoQ and 9.9% YoY, mainly attributed to higher income from its unit trust division, forex transactions and traditional banking services.

Profitability:  Nonetheless, total income only grew 6.5% YoY and 3.1% QoQ due to a slower growth rate achieved by Islamic banking business. This business segment  only grew 1.3% QoQ but declined 0.5% on a YoY basis. However, the profitability was boosted by better bottomlines (net profit grew 5.7% QoQ and 8.6% YoY). This trend is well within expectations. 

The Group continues to be the most efficiently managed Malaysian bank. Operating expenses declined 0.3% QoQ and only added 5% YoY. As a result, cost/income ratio was well-controlled at 30.8%, which is 106pps and 89pps lower as opposed to 1Q13 (31.9%) and 2Q13 (31.7%). 

Allowance for impairment on loans also declined 6.3% QoQ and 8.7% YoY, inline with a sustained low gross impaired loan ratio of 0.67% (vs. 0.68% in 1Q13 and 0.75% in 2Q12, in contrast to industryaverageyofv2.0%, positioning the Group as one of Malaysian banks possessing solid asset quality. Loan loss reserve remained prudent at 123.2% (vs. 123.9% in 1Q13 and 122.9% in 2Q12) vis-à-vis industry average of 99.2% (as at end-May13).

Annualised ROE of 22.2% was slightly ahead of our FY13 estimate of 21% and above the 2013 KPI of 20%.

Capital adequacy: Despite the redemption of its RM1.4b subordinated note in May 13, the Group common equity Tier-1, Tier-1 and Total capital ratios stood at 8.5%, 10.4% and 12.8%, respectively, post interim dividend payment. While these ratios are lower as compared to the banking industry average of 11.9%, 12.8% and 14.1% as of end-May 13, we believe this is not a major concern given that these ratios have already surpassed the capital requirements under the Basel III regime, i.e. 7.0%, 8.5% and 10.5% by Jan19.

Outlook    Going forward, we believe the Group will continue to focus on its target business segments, i.e. retail loans, unit trust and bancassurance. 

The management is still aiming to grow its loans book and customer deposits base by 11%-12%, which we believe is highly achievable despite potential administrative measures.

We understand that the recent tightening in lending requirements has no significant impact to the Group thus far. For instance, the Group has always been paying less attention to personal loan (only accounted for <1% of the entire loan book). Even on the mortgage front, the measure to cap financing period up to 35 years will not have a major impact to loan growth as this particular segment is relatively small.  

However, due to the pricing competition and sign of rising in gross impaired loan in hire purchase segment, the Group could probably stay cautious in passanger car financing.

Judging from the 1H13 results, we also believe that the Group should be able to achieve its other 2013 KPIs such as (i) ROE >20%, (ii) Total capital ratio >12%, (iii) gross impaired loan ration <1% and (iv) cost-to-income ratio <32%.

Change to Forecasts    No change in our earnings estimates.

Rating   Maintain OUTPERFORM

We believe the Group will continue to grow from strength to strength.

Being one of the very few consistent performers on the Bursa with a potential turn return of ~10%, including a potential dividend yield of 3.1%, to our Target Price (“TP”) of RM18.20, we maintain our OUTPERFORM rating.

Valuation     At our TP of RM18.20, we basically value the Group at an unchanged FY14 P/BV multiple of 2.8x, which implies a 14.1x PER on its FY14 EPS.

Risks    Slower than expected household lending growth.

Source: Kenanga