Period     2Q13/1H13

Actual vs. Expectations     The 1H13 net profit of RM3.2b came in generally in line with expectations, making up 51.0% of the consensus forecast and 51.9% that of ours. 

However, the 2Q13 results were somewhat hit by higher provisions of RM428.4m (+>400% QoQ% & +>100% YoY) due to higher net individual allowance made. The management has guided for a reduction in credit charge-off ratio as well as cost-income ratio (“CIR”) in 2H13 meaning that the full-year results could surpass expectations. Hence, we have revised our numbers marginally.

Dividends    Proposed a single-tier interim DPS of 22.5 sen (vs. 32.0 sen less 25% taxation in 1H12), of which 16.0 sen can be elected to be reinvested in new share under the DRP. The 37.5% decline in DPS was due to: (i) 12% larger in share base; and (ii) the full utilisation of tax credit under Section 108. 

As such, we have fined-tuned our NDPS estimates of 57.0 sen for both FY13 & FY14 lower to 53.0 sen and 56.0 sen, respectively, representing 70% payout ratio. The assumed payout ratio is higher than the guidance of 40%-60% on the assumption that investors opt for DRP, hence less cash outflow resulting in higher capital adequacy. 

Key Result Highlights

6M13 vs. 6M12:

Total income grew 8.1% YoY driven by a much faster growth pace in Islamic banking (+16.4%). 

The net interest income grew slower at 6.0% YoY despite gross loan growing by 10.1% YoY due to a marginal NIM compression of 3bps. The welldefended NIM was partly due to the quicker growth in low-cost deposits/CASA, which grew 13.6% YoY (vs. total customer deposit growth of 9.5%). Thus far, CASA accounted for 34.2% of total customer deposits (vs. 33.0% as at endJune 13). 

However, we notice the loan growth was driven by shorter tenure loans (<1 year +21.6% & 3-5 years +21.9%). As such, the underlying growth rate of loan may not be sustainable; hence the crucial need for the Group to actively replenish its loan book. We also notice that its SME loan portfolio declined 7.2% YoY and the Group seems to target corporate and consumer segments. Loan to individual grew 11.2% YoY driven by auto financing and mortgages, which grew 17.2% and 13.0% YoY, respectively.

Although relatively negligible, net income form insurance and takaful businesses contributed RM56.3m for the first 6-month in contrast to a loss of RM25.8m for the same period last year. 

The non-interest income also grew marginally at 5.3% YoY despite recording gains from sale of financial assets and financial investments of RM274.4m. This is because the gains were offset by higher unrealised losses on revaluation of financial assets and derivatives of RM326.1m.

As the Group’s operating expenses grew at a slight  slower YoY rate of 7.2%, the CIR improved marginally to 49.8% (from 50.3% during 6M12).

As mentioned earlier, the allowances of loans impairment jumped 33.1% YoY due to higher net individual allowance made (+46% YoY) arising from slower recoveries. As a result, the Group's net impaired loan ratio improved to 1.09% as at end-June 13, comparing to 1.28% as end-June 12 (Gross impaired ratio also improved 1.86% from 2.00%).

While the effective tax rate was lower at 24.5% during the first 6-month period (vs. 27.4% previously), the EPS declined 0.5% YoY due to larger share base by ~11%, arising from a 10% share placement exercise done in 4Q12.

2Q13 vs. 2Q12:

The total income and net profit grew 7.6% and 4.1% QoQ. 

The QoQ growth in most of the profit lines seems encouraging and hence should support better earnings prospect in coming quarters. 

However, net interest income declined 1.9% QoQ despite a growth of 3.1% QoQ in loans. This is because NIM declined 5bps during the quarter (2Q13: 2.42%, 1Q13: 2.47%).

Operating expenses grew marginally at 1.4% QoQ with a registered CIR of 48.4% in 2Q13 vs. 51.4% in 1Q13, reflecting the efforts of the management to control cost. This trend should favour the Group’s profitability in 2H13.

As mentioned earlier, allowances of impairment loans surged significantly (>400% QoQ). However, this could be one-off and the management has guided for lower credit charge-off rate going forward.

The effective tax rate for the quarter is much lower at 22.3% vs. 26.7% in 1Q13. 

Outlook    The management has set KPIs to grow its loans and deposits by 12% each. We also understand that the Group will focus more on ETP-related  projects in growing its loan book.

However, due to higher external volatility and uncertainty and coupled with the unfavourable loan mix, we only imputed 8.5% and 11% loan and deposit growth rates for FY13. As for FY14, we tentatively peg these growth rates at lower levels of 4.5% and 8.5%, respectively. 

We do not rule out further compression in NIM in coming quarters given that we noted quite a substantial decline in NIM during the quarter. In fact, the management has guided for 10bps compression in NIM for FY13. We have assumed 10bps and 5bps declines in NIM for FY13 & FY14. 

As the management has guided that the CIR and credit charge-off ratio should improve in 2H13, we have imputed in lower CIR of 48.7% and 48.2% for FY13 and FY14 (vs. 49.1% in FY12). 

However, to remain prudent and the fact that the trend of loan loss provisions seems volatile, we prefer to factor in a slightly higher credit ratio of 0.23% for both FY13 & FY14 (vs. 0.22% in FY12).

Change to Forecasts   Taking the afore-mentioned factors into consideration, we have made some changes to our earnings estimates. Our FY13 and FY14 net profit estimates are revised higher (due mainly to lower cost) to RM6,553.0m and RM6,921.4m from RM6,130.0m and RM6,837.2m, respectively, representing upgrades of 6.9% and 4.2%.

Based on our latest forecasts, we believe the Group should be able to achieve its ROE KPI of 15.0%. Our estimated FY13 and FY14 ROEs are pegged at 15.2% and 15.3%, respectively. 

We have also fined-tuned our NDPS estimates of 57.0 sen for both FY13 & FY14 lower to 53.0 sen and 56.0 sen, respectively, representing 70% payout ratio and dividend yield of >5%. 

The assumed payout ratio is higher than the guidance of 40%-60% due to our assumption that investors could opt for DRP, hence resulting in less cash outflow and higher capital adequacy. As of end-June12, Tier 1 & Total capital ratios stood comfortably at 12.2% and 14.8%.

Valuation     Following our earnings revisions, we have upgraded  our Target Price (“TP”) to RM11.00 from RM10.90 based on an unchanged 2.0x FY14 P/BV and implied 13.9x FY14E PER. These targeted prices multiples represent the respective 3-year average.

Rating  Maintain OUTPERFORM

Our OUTPERFORM rating is maintained as the current share price implies a potential total return of >15% (capital gains: 10%, dividend yield >5%) to our TP.

Risks    (i) Tighter lending rules and slower loan growth, (ii) Slower than expected ETP projects rollouts, (iii) Keener competitions and hence further margin  squeeze; and (iii) sharp turn in NPLs hence higher credit charge.

Source: Kenanga