Period  3Q13/9MFY13

Actual vs. Expectations  Within expectations. The reported 9M13 net profit of RM3.0b accounted for 75% to our estimate of RM4.07b and 73% of the consensus estimate of RM4.15b.

Dividends  No dividend was declared in this quarter as expected.

Recall that the Group had paid out a 22.0 sen interim dividend in 1H and we continue to maintain our full-year NDPS of 52.4 sen, implying 45% payout and a net yield of 2.9%.

Key Result Highlights

 Loan: Despite the keen competition and tighter administrative measures, the Group still registered a total loan growth of 12% on an annualised basis. While slightly below our expectation of 15%, the growth rate is still higher than the industry YoY loan growth of ~9.3% as at end-Aug 13. The Group’s loan growth was mainly driven by housing, commercial property and SME loans which grew 16.6%, 16.8% and 19.2% YoY, respectively.

 Deposits: Total customer deposits grew 12.3%, higher than the banking industry’s YoY growth of 8.0% (as at end-August 13), placing the LDR at 87.2% vs. 87.1% and 87.6% in 2Q13 and 3Q12, respectively. CASA-to-Total Deposits stood at 25.1% (2Q13: 25.2%) inline with industry average of 25.6%.

 Interest Income: NIM was almost flat at 2.37% QoQ (2Q13: 2.36%) but was 6bps and 15bps lower vis-à-vis end-Dec 12 and end-Sep 12. Consequently, net interest income grew slower at 5.3% YoY (or 2.6% QoQ) to RM1.42b in 3Q13 vs. RM1.39b in 2Q13 and RM1.35b in 3Q12. Islamic Banking Income, on the other hand, grew slower at 0.5% YoY (or 2.8% QoQ) despite enjoying a higher annualised financing and advances growth of 16.4% as compared to the Group.

 Non-interest income, which accounted for 30.9% of total income, was mainly attributed to higher fee-based income from unit trust & bancasurrance, foreign-exchange related transactions and transactional banking services. This income stream declined 1.7% QoQ but grew 3.7% YoY.

 The Group continues to be the most efficiently managed Malaysian bank. Operating expenses declined 2.8% QoQ but grew 1.0% YoY. As a result, cost/income ratio was well-controlled at 30.7%, representing slight improvements from 30.8% in 2Q13 and 30.5% in 3Q12.

 Allowance for impairment on loans also increased 35.4% QoQ and 26.7% YoY in line with upticks in impaired loans. Nonetheless, its gross impaired loan ratio of 0.69% (vs. 0.67% in 2Q13 and 0.72% in 3Q12, in contrast to industry average of 1.4%, still positions the Group as one of Malaysian banks with solid asset quality. Loan loss reserve remained prudent at 117.3% vis-à-vis industry average of 98.2% (as at end-Aug13) while declining from 123.2% in 2Q13 and 124.5% in 3Q12.

 Annualised ROE of 21.9% was slightly ahead of our FY13 estimate of 21.3% and above its 2013 KPI of 20%.  Capital adequacy: After issuance of a landmark issuance of RM1.0b Basel III-compliant subordinated medium-term notes, which qualify as Tier 2 Capital, on 25 Sept. 2013, the Group’s common equity Tier 1 capital ratio, Tier 1 capital ratio and total capital ratio registered at 8.2%, 10.1% and 12.8%, respectively, as at the end-Sep13.

Key Result Highlights  While these ratios are lower as compared to the banking industry average of 12.0%, 12.8% and 14.1% as of end-Aug 13, we believe this is not a major concern given that these ratios already surpassed the capital requirements under the Basel III regime, i.e. 7.0%, 8.5% and 10.5% by Jan19.

 As such, we maintain our dividend payout ratio estimate of ~45% for now.

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

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

 While this set of results show a slightly higher credit cost, but it was cushioned by the lowerthan-expected operating expenditure. Hence, we believe the Group should be able to maintain its cost-to-income ratio and credit cost well below 33% and 100bps for the year.

 Judging from the 9M13 results, we also believe that the Group should be able to achieve 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 changes in our earning estimates.

Rating  Due to its strong YTD share price performance of >13.6% and outperforming the FBMKLCI by 6.8%, we believe the upside from this point forward could be less exciting.

 Hence, we revise our rating lower to MARKET PERFORM from OUTPERFORM based on our rating definitions.

Valuation  The stock is being traded at RM18.50, representing 15.2x FY14 PER and 2.9x FY14 PBV.

 While we do not rule out a potential rerating up to 3.0x FY14 PBV, -1SD below the 3-year average of 3.2x, or RM19.10/share, the potential total return is still less than 10%.

Risks  Slower-than-expected household lending growth.

Source: Kenanga