Period  4Q14/FY14

Actual vs. Expectations Within expectations. The reported FY14 net profit of RM1,782.4m (+10.0% YoY), accounted for 98.9% of consensus estimate of RM1,802.6m and 98.3% of our full-year forecast of RM1,813.7b.

Dividends  The group has proposed 16.9 sen final dividend lifting the full-year FY14 DPS to 24.1 sen as opposed to 22.0 sen in FY13 and our FY14 DPS estimate of 24.0 sen. The dividend payout of ~41% is also in line with management guidance of 40%-50%.

Key Results Highlights

FY14 vs. FY13

 On a YoY basis, the group’s net profit grew 10.0%, driven by a decent total income growth of 8.1% and a well-contained cost-to-income ratio (CIR) of 45.0% (vs. 46.9% in FY13) as well as lower loan loss charge of 8bps (vs. 21bps in FY13).

 Net interest income grew at a more moderate pace of 2.4% YoY owing to a lower-than expected loan growth of 5.3% (vs. management guidance of 7.0%, our estimate of 7.3% and industry average of 10.7% as at end-Feb14) as well as further compression in NIM (~5bps).

 The growth in loans was mainly driven by nonretail segment (+11.2% YoY vs. retail loans growth of 1.1%). We understand that the bulk of these loans was attributable to wholesale subsegment, accounting for 44.7% of the total loans which grew 11.1% YoY. Auto financing, which is the group’s largest retail loan contributor with

29.1% of loan share, was flat (-0.8% YoY). Mortgages, on the other hand, grew 8.7 YoY and accounted for 19.6% of total loans. Total customer deposits grew in quite a similar pace, hence gross loan-to-deposit ratio (LDR) remained relatively steady at 99.5%.

 On the back of the growth of 11.2% in Islamic financing and advances, net income from Islamic banking grew 6.3% YoY.

 Non-interest income grew strongly at 19.5% YoY mainly driven by insurance & takaful business (+88.6% YoY and accounted for ~60% of noninterest income) partially reflecting cross-selling and collaborative efforts across the Group after the integration of Kurnia and MBF Cards.

 Despite the acquisitions and investments, the Group’s CIR declined to 45.0% from 46.9% as operating expenses only grew at a marginal pace of 3.9%.

 While the bottom-line was driven by lower loan loss charge of 8bps, in contrast to 21bps in FY13, impairment loss for doubtful sundry receivables was higher at RM69.1m vs. RM5.2m in FY13.

 As of end-Mar14, the Group’s gross impaired loans ratio stood at 1.9% (vs. 2.0% in 4Q13). Loan loss coverage stood at 127.4% (vs. 129.3% in 4Q13), which was higher than industry average of 104.5% as at end-Feb14.

 ROE registered at of 14.1% (vs. 14.0% in FY13) which was within the management’s KPI of 14.0%-14.5%.

 The Group remains well capitalised and operated within internal target capital levels for FY14. Post dividend payment, Common Equity Tier 1 (CET1), Tier 1 and Total Capital ratios will stand at 9.8%, 11.2% and 15.5%, outperforming the management’s targets of 8.5%, 10.5% and 14.5% respectively.

4Q14 vs. 3Q14

 On a QoQ basis, the group’s net profit grew 9.6% driven by a much lower effective tax rate 18.3% (vs. 28.2% in 3Q14). Otherwise, performance should see weakness on a quarterly sequential basis.

 The lower profitability was owing to lower net income from insurance business and other operating income. In addition, higher allowance for impairment on loans and financing as well as sundry receivables coupled with higher acquisition and business efficiency were the major factors that dragged earnings down.

 The bottom-line, however, improved by lower operating expenses. CIR declined to 41.0% from 43.6% in the previous quarter.

Outlook  The management is targeting to achieve a net earnings growth of c.10% in FY15 and 9%-11% in FY16-FY17. The management also sets their ROE KPI at 14.2%-14.5% in FY15 and 14.5%-15.5% in FY16-FY17.

 Going forward, while the profitability of the Group is expected to improve by adopting strong cost control, which could result in 10bps reduction in CIR p.a., and loans growth of ~9%, we still believe this could be an uphill task.

 This is because: (i) NIM is guided to contract further by 15bps and (ii) loan loss charge is expected to normalise to 30bps.

 Besides, while the bank has started to diversify its lending directions from the traditional lending (household and SME) to other segments such as corporate loans for better growth and asset yield, 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 growth trend in loans.

 Nonetheless, on a positive note, non-interest income could grow stronger than expected as the management aims to: (i) reap more synergies from integrations post MBF card and Kurnia acquisitions, (ii) partner with strategic business partners such as MetLife International Holdings Inc. to grow its business in AmLife and AmFamily Takaful, and (iii) grow its banking transaction and forex businesses. In fact, the management aims to drive non-interest income to 38% of the total income. Thus far, we only estimate a 35% contribution from non-interest income to total income.

Change to Forecasts Taking the above-mentioned factors into consideration, our FY15 net earnings estimate has been revised lower to RM1,838.6m (+3.2% YoY) from RM1,922.2 previously, representing a negative revision of 4.3%. We also introduce a FY16 net earnings estimate of RM2,049.6m (+11.5% YoY).

 Based on our estimates, FY15 and FY16 ROEs are expected to register at 13.4% and 13.8%, respectively. Should these estimates are proven right; the Group may not be able to meet its FY15-FY16 ROE KPIs of 14.2%-15.5%.

As for dividend estimates, the management is targeting a payout ratio between 40% and 50%. In our estimate, we have assumed a 40% payout ratio, hence our FY15-FY16 DPS estimates of 24.0-27.0 sen.

Rating Maintain MARKET PERFORM

Valuation  We have revised down our Target Price (TP) from RM8.10 to RM7.80 due to: (i) downwards earnings revision and (ii) lower target price multiples due to slower growth and lower ROE estimates.

 At our TP of RM7.80, the stock is valued at 12.8x to its FY15 EPS of RM0.61 or 1.6x to its FY15 BPS of RM4.73.

 These target price multiples are lower as compared to its last 2 years’ range (PER: 12.1-12.2x; PBV: 1.64-1.65x) as ROEs for the last previous 2 financial years registered at 14.0%-14.1%.

Risks to Our Call    (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