Period  3Q13/9M13

Actual vs. Expectations The 9M13 net profit of RM4.8b came in broadly in line with our estimate but slightly above the street’s expectations, making up 73.6% of our forecast (of RM6.55b) and 77.0% of the consensus estimate (of RM6.26b), respectively.

 The annualised ROE of 14.7% on track to meet the Group’s full-year target of 15.0%.

Dividends  No dividend was declared during for the financial quarter, as expected.

Key Result Highlights

9M13 vs. 9M12 Net profit of RM4.82b, which grew 12.5% YoY in 9M13, was supported by a Total Income growth of 9.9%. The stronger top-line growth was driven by net incomes from: (i) Insurance and Takaful business (+226.8% YoY) and (ii) Islamic Banking Business (+20.7%). The stronger Islamic Banking Income was also in line with a strong Financing growth of 37.2% YoY while the entire loan base only grew at a lower rate of 12.0% YoY (or 9.3% on annualised basis for 3Q13).

 However, the gross loans growth still met the management guidance of 12% and is slightly ahead of our previous full-year gross loan growth estimate of 8.5%. Household (+14.2% YoY) loans remained the major growth driver which accounted for 45% of the entire loan base. While Domestic Business Enterprises accounted for 38% of the entire loan book, it only grew 5.8% YoY as SME loans declined 11.7% (but was cushioned by corporate loans growth of 32.8%). In terms of loans by economic purpose, share margin financing, auto financing, residential and non-residential loans accounted for c.50% of the entire loan book. These segments grew at 21.4%, 12.6%, 14.5% and 28.1% YoY, respectively. As for NIM, while it was almost flat on a YTD basis (but -10bps YoY or -3bps QoQ). Consequently, Net Interest Income only grew 4.4% YoY.

 Coupled with a slightly higher group deposit growth of 14.4% YoY, the Group Loan-to-Deposit (LD) ratio declined to 88.2% as of end-Sep13 from 90.0% as at end-Dec12. The deposit growth is ahead of our estimate of 10.8%. The Group also continued to benefit from its established franchise, recording healthy growth in deposits, particularly in low-cost deposits (CASA). The ratio of CASA to Group's total deposits rose to 36.1% from 34.7% in end-Sep12.

 As for non-interest income, while it grew at a decent rate of 9.5% YoY, the sustainability of such growth was somewhat questionable. This is because out of the RM4.7b non-interest income, net Forex gains accounted for ~20% (or amounted to RM932m for 9M13) in contrast to 12% (or RM514m out of RM4.3b) in 9M12. Excluding the additional 8% contribution to non-interest income, the segmental income growth could have been flat.

 The bottom-line of the Group was also boosted by better Cost-to-Income (CTI) ratio. The ratio improved to 48.8% from 50.8% as operating overheads only grew 5.7% YoY. Nonetheless, this advantage was overshadowed by much higher allowances for loan impairment losses (+71.7% YoY), resulting in a higher annualised credit charge ratio of 32bps vis-à-vis 21bps in 9M12. This credit ratio is also higher than our expectation of 23bps. The higher credit cost is in line with the cyclical up-tick in credit cost that was also seen in other banking groups.

 Having said that, the Group Gross Impaired Loan (“GIL”) ratio improved to 1.83% (end-Sep13) from 1.90% (end-Sep12). Loan loss coverage also strengthened to 106.3% from 104.7% in 3Q12.

 Despite a 12.5% YoY growth in net profit, the EPS only grew 1.3% YoY due to larger average share base, which expanded ~11%, arising from a 10% share placement exercise done in 4Q12.

 The banking group remains well capitalised with Tier 1 and Total Capital ratios at 12.6% and 15.2%, respectively (vs. 11.7% and 15.5%, respectively, as of end-Sep12).

 The annualised ROE of 14.9% is in line with the Group’s full-year target of 15.0%.

3Q13 vs. 3Q12

 The total income and net profit grew 2.2% and 11.4% QoQ.

 The stronger bottom-line growth was due mainly to lower operating overheads (-1% QoQ) where CTI ratio improved to 46.6% from 48.0% in 2Q13 and allowances for loan impairment losses (- 34.6% QoQ). Recall that allowances for impairment of loans surged significantly (>400% QoQ in 2Q13) due to provisions for one-off lumpy corporate (bad) loans. The lower operating expenses also nudged CTI ratio lower to 46.9% vs. 48.4% in 2Q13.

 Net interest income was almost flat (+0.5% QoQ) despite a growth of 2.3% QoQ in loans. This is because NIM declined 3bps during the quarter (3Q13: 2.39%, 2Q13: 2.42%, 1Q13: 2.47%).

 Net income from Insurance and Takaful business also grew significantly by >600% to RM265.2m from RM37.4m owing to much lower net benefits and claims (-50% QoQ).

Outlook  The management maintain its ROE Target of 15%.

 The management also target to grow both its loan book (Malaysia: 12%, Singapore: 11%, Indonesia: 22%) and customer deposits by 12% p.a..

 In order to achieve its Malaysian loan book, the Group aims to: (i) increase trade finance business, (ii) focus on corporate lending, (iii) increase deposit taking, and (iv) maintain lending momentum in consumer segment.

 For Singapore market, the Group: (i) targets selective consumer lending, in view of tighter guidelines & competitive landscape, while (ii) continuing to focus on deposit gathering.

 As for Indonesia, the Group will: (i) continue its traction on retail and SME lending, albeit cautiously in view of asset quality concerns, (ii) leverage on wider branch coverage to continue business growth, and (iii) implement proactive management on asset quality.

 Nonetheless, the management also acknowledges that the operating environment is getting challenging amidst: (i) concerns on QE tapering, (ii) tighter monetary policies in Indonesia, (iii) tighter retail financing guidelines, and (iv) delayed deal pipeline amidst market uncertainties. However, the management expects more IPO activities in 4Q13.

Change to Forecasts All in all, we have fine-tuned our FY13 and FY14 net profit estimates from RM6,553m and RM6,921m to RM6,412.9m and RM6,760.6m or negative revisions of -2.1% and -2.3%, respectively.

 Our downward revisions for FY13 and FY14 have taken into account (i) higher credit cost of 32bps and 42bps (vs. 23bps and 23bps) and (ii) larger NIM contraction of 10bps and 7bps (vs. 5bps and 5bps), respectively. Nonetheless, these negative factors were partially neutralised by (i) higher loans growth of 9.3% and 4.6% (vs. 8.5% and 4.3%) and (ii) lower CTI ratio of 48.8% and 47.6% (vs. 48.7% and 48.2%).

 We also lower our FY13 and FY14 NDPS forecasts from 53.0 sen and 56.0 sen to 51.0 sen and 54.0 sen, respectively, based on an unchanged payout ratio of approximately 70%.

Valuation  In line with the FY14 earnings downgrade, we also lower our Target Price (TP) from RM11.00 to

RM10.40, implying 8.9% upside from here, with an unchanged 2.0x FY14 P/BV (implies a 13.5x FY14 PER). These targeted price multiples represent their respective 3-year average.

Rating Maintain OUTPERFORM

 Our OUTPERFORM rating is maintained as the current share price implies a potential total return of >10% (capital gains: ~9%, dividend yield >5%) to our TP after recent price corrections.

Risks to Our Call

 (i) Tighter lending rules and slower loan growth, (ii) Slower-than-expected implementations of ETP projects, (iii) Keener competitions and hence further margin squeeze, and (iii) Sharp spike in NPLs hence higher credit charge.

Source: Kenanga