Period  4Q13/FY13

Actual vs. Expectations  The reported 12MFY13 net profit of RM1.86b (+6.5% YoY) is in line with consensus estimate of RM1.90b (98%) and our forecast of RM1.91b (97%).

Dividends  Declared a final GDPS of 30 sen (vs. 27 sen in FY12), raising the full-year GDPS to 45 sen (vs. 38 sen in FY12)

Key Results Highlights

FY13 vs. FY12

 Net interest income dipped 3.4% YoY owing to a reduction in NIM which declined 17bps from 2.30% in FY12 to 2.13 in FY13 despite gross and net loans growth of 7.3% and 8.2% YoY, respectively. However, these growth rates were below the industry loans growth of 9.1% as of end-June 13.

 Apart from the traditional residential and nonresidential property financing which increased 10.8% YoY and accounted for 46.4% of the entire loan book, domestic SME loans was also one of the main growth drivers with a commendable growth rate of 20.5% which accounted for 14.9% of the total loan.

 Despite seeing a dip in net interest income, total income managed to register a mild YoY growth of 3.3% owing to strong non-interest income, which grew 25.4% YoY, while Net Income from Islamic banking remains pretty flat (+1.6% YoY).

 Non-interest income accounted for ~26.0% of the total loan in FY13 as opposed to 21.0% in FY12. The strong growth in non-interest income was driven mainly by Forex, Trading & MTM (FY13: RM423m, FY12: RM204m, +>100% YoY), which accounted for 40% of the total noninterest income.

 The Cost-to-Income ratio (“CIR”) improved to 46.1% from 49.6% in FY12 due to lower operating expenses (-4.0% YoY) due mainly to reduction in personnel cost (-14.1% YoY). We believe the reduction in personnel cost could be due to some non-recurring integration costs charged in FY12.

 Allowances for impaired loans normalised to RM41.4m from write-backs of RM14.8m in FY12. As a result, credit charge ratio registered at 4bps (vs. -2bps in FY12).

 Thus far, gross impaired loans ratio continued to improve. It remained low at 1.4% as at end-June 13 (vs. 1.7% in FY12). Loan loss coverage also remains high at 131.3% (vs. FY12’s 133.4%), above the industry average of 101%.

The growth in PBT (+7.0% YoY) was also supported by a higher share in results of associates (attributable to Bank of Chengdu) (+21.7% YoY).

 ROE was lower at 15.2% (vs. 18.5% in FY12) despite a higher Loan-to-Deposit ratio (“LDR”) of 77.2% (vs. 71.6% in FY12). The higher LDR was due to slower growth in customer deposits of 0.4% YoY compared to loans.

 Nonetheless, capital adequacy ratios remains comfortable and way above regulatory requirements. Tier 1 and Total capital ratios stood at 12.32% (FY12: 11.96%) and 15.18% (FY12: 15.74%), respectively.

4Q13 vs. 3Q13

 Total income dipped 5% QoQ due mainly on declines in: (i) non-interest income (-14.8% QoQ); and (ii) net income from Islamic banking (-8.1% QoQ) while interest income was almost flat.

 No detail was given, but we suspect it was mainly due to seasonal impact as we saw similar trend in past years.

 The PBT and net profit also declined 10.0% and 8.4% QoQ, respectively, despite seeing a much lower allowances of impaired loans (-31.5% QoQ) due to higher operating expenses (+8.0% YoY). The higher expenses were driven by higher establishment (+18.3% QoQ) and marketing (+18.6% QoQ) costs, which are a form of investment for future growth.

Outlook Management has guided for the following:

 Total loan growth: ~10%. However, in view of their cautious tone and given that total loans only grew <8% for the last 2 years, we only imputed 7.5% growth for the next 2 financial years.

 Customer deposit growth: High single-digit. As the LDR still remains supportive for growth, we believe the bank may not push deposit growth in an aggressive manner, hence we only factor in 5% growth for the next 2 financial years.

 NIM: To sustain above 2%. We have factored in 2% NIM for the next 2 financial years.

 CIR: 42%-45%. However, we believe this may not be achievable in the short-term due to keener competition where we expect higher promotion and marketing expenses. Besides, we also believe other costs will remain sticky as well. Hence, we only factor in a gradual mild reduction in CIR (FY14: 45.8%, FY15: 45.2%).

 Credit charge ratio: 25-30 bps. Due to the continue improvement in gross impaired loan ratio, we believe the credit charge may continue to remain low, say <10bps, unless operating environment turns more volatile and challenging.

 ROE: 15%-17%. We believe this is achievable. In fact, we estimate ROE to register at 15.1% for the next two financial years.

 Net dividend payout ratio: Remains at 1/3. We have revised our NDPS to 36 sen in FY13 (from 35.1 sen) and introduce our FY15 NDPS at 39 sen.

Change to Forecasts  With the management guidance, we have fine-tuned our FY14E net profit to RM2,054.1m from RM2,202.1m. We also introduce our FY15 net profit estimate at RM2,253.1 (+9.7% YoY)

Rating   Maintain MARKET PERFORM

 While the stock offer slightly >10% upside from here (after recent price corrections), we continue to maintain our Market Perform rating, as we believe the stock may go through a de-rating as its growth is showing sign of weakness.

Valuation  Maintain our Target Price (“TP”) of RM15.20, implying FY14E and FY15E BPS of 2.0x and 1.8x, respectively. At this TP, it is also valued at 13.9x and 12.7x FY14 and FY15 PERs.

Risks  Tighter lending rules and further margin squeeze in general.

 Tougher operating environment especially in treasury market.

 Higher than expected credit charge due to deterioration in asset quality.

Source: Kenanga