Period  3Q14/9M14

Actual vs. Expectations Within expectations. The reported 9M14 net profit of RM1,329.6m (+9.0% YoY), accounted for 74% of consensus estimate of RM1,802.6m and 73% of our full-year forecasts of RM1,813.7b.

Dividends  No dividend was proposed as expected after a single tier interim dividend of 7.2 sen was declared in 1H13.

 Our FY14 full-year DPS estimate of 24 sen/share is based on 40% payout, which is in-line with management guidance.

Key Results Highlights

9M14 vs. 9M13

 Net interest income growth was almost flat at +0.9% YoY despite the gross loans growing 6.1% YoY. The slower growth in net interest income was due to further compression in NIM, c.5bps YoY.

 The growth rate in loans, however, was also below management’s guidance of 7.0% and our estimate of 7.3%. This was due mainly to a single large repayment of corporate & institution loan in 1H14. Nonetheless, we understand that the Group managed to achieve decent growths in their targeted/selective segments such as SME (+14.4% YoY) and domestic business enterprises (+9.7%). Thus far, non-household loans accounted for 46% of total loan as at end-Dec13. Loans to household, on the other hand, grew 3.6% mainly driven by mortgages (+9.5%). Lending to transport vehicles saw a 2.3% YoY probably owing to uncertainties ahead of the NAP announcement then.

 Total customer deposits grew 6.0% YoY and the low-cost deposits, CASA, grew even faster at 12.3% YoY, making the portion of CASA to total customer deposits improving to 19.7% as of end-Dec13 as opposed to 18.6% at end-2012. Nonetheless, this ratio is still below the industry average of 26.5%.

 In line with the annualised net Islamic financing and advances growth of c.7.3%, net income from Islamic banking grew 5.6% YoY.

 Non-interest income grew strongly at 34.9% YoY. The segmental income was mainly driven by insurance (+54.6% YoY in revenue) partially reflecting cross-selling and collaborative efforts across the Group after the integration of Kurnia and MBF Cards.

 While cost-to-income ratio (CIR) remains sticky at around 46.1% in 9M14 (vs. 44.9% in 9M13), the ratio could gradually improve judging from the lower value registered during 3Q14 at 43.6%.

 While the credit charge ratio remained low at 1bps during 9M14 as opposed to 16bps in 9M13, we believe the trend of normalisation in credit cost could have already started to kick in. We saw approximately 16bps credit charge in 3Q14 in contrast to net writebacks of c.RM10m in 2Q14 due to some recoveries of corporate loans, which are non-recurring in nature. The normalisation in allowances of loan impairment, say 20bps in credit cost, is actually within the management guidance.

 As of end-Dec13, the Group’s gross impaired loans ratio stood at 2.0% (vs. 2.1% in 3Q13). Loan loss coverage stood at 119.3% (vs. 123.5% in 3Q13) which was higher than the industry average of 107.6% as at end-Dec 13.

 We understand that the Group is able to meet the minimum collective assessment allowance (CA) plus regulatory reserve ratio of 1.2%, as a percentage of gross loans net of government loans and individual allowance (IA). Based on our calculation, the ratio was registered at 3.1% as at end-Dec 13.

 Annualised ROE of 14.2% (vs. 14.2% in 9M13) was within the KPI of 14.0%-14.5%.

 The Group remains well capitalised with Tier 1 and Total Capital ratios at 10.8% and 14.9%, outperforming the management’s KPIs of 10.5% and 14.5% respectively.

3Q14 vs. 2Q14

 Not a meaningful comparison as this set of quarterly numbers was adjusted for restatement on accounting for acquisition of AmGeneral Insurance Bhd.

Outlook  While banks have started to diversify their lending directions from the traditional household ending

(mortgage and hire purchase) and SME to other segments such as share financing and corporate loans for better growth and asset yield, however, risk profile for such loans could be higher and tenure for such loans could be shorter as well. This could eventually translate into: (i) deterioration in asset quality and (ii) less sustainable trend in loans growth.

 In fact, we have seen loan growth momentum showing sign of weakness and we also suspect the historical low credit cost may not be sustainable and is poised to normalise in coming quarters.

 The management aims (i) to reap more synergies from integrations post MBF card and Kurnia acquisitions apart from (ii) partnering with strategic business partners such as MetLife International Holdings Inc. to grow its business in AmLife and AmFamily Takaful as well as (iii) grow its banking transaction and forex businesses.

Change to Forecasts No change in our earnings estimates for now.

 Our FY14 and FY15 net earnings estimates remain unchanged at RM1,813.7 (+11.7% YoY) and RM1,922.2 (+6.0% YoY).

 Based on our estimates, FY14 and FY15 ROEs are expected to register at 14.4% and 14.0%, respectively. Should these estimates are proven right, the Group should be able to meet its FY14 ROE KPI of 14.0%-14.5% but might not be able to meet FY15 ROE KPI of 14.5%-15.5%.

Rating  Our Target Price (TP) of RM8.10 remains unchanged. This TP is based on ~13x FY15 PER or 1.7x FY15 PBV, which are in line with the 3-year price multiple averages.

Valuation  While the stock offer approximately 10% upside (from here) to our TP, we still maintain our

MARKET PERFORM call due to our cautious sector view.

 Besides, we believe there is a risk for de-rating as the stock should only be priced at ~1.55x FY15 PBV with a backing of 14.0% ROE as per our regression study (Fwd. PBV = 17.87* Est. ROE –0.96). Note that our target PBV of 1.7x PBV implies a potential Forward ROE of 15%.

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

Source: Kenanga