Period  4Q14/FY14

Actual vs. Expectations

 Within expectations. The reported FY14 net profit of RM563.6m (+4.7% YoY) accounted for 104% of our forecast (RM540.5m) and 101% of consensus estimate (RM556.3m).

Dividends  The group has proposed a special dividend of 10.5 sen with the ex-date falling on 9 June 2014, raising the full-year DPS to 29.5 sen.

 This implies a payout ratio of >80% which is far higher than the Group’s previously set dividend payout policy of 50%.

Key Results Highlights

FY14 vs. FY13

 FY14 net profit grew 4.7% YoY while total income merely grew at a slightly lower pace of 3.0% YoY.

The low single-digit growth in total income was due to the 12.9% YoY decline in Islamic Banking Income resulting from run-off of higher-yielding co-op loans. However, it was cushioned by the decent growth in net interest income that grew 6.6%.

 Nonetheless, the growth in net interest income was lower than the gross loans growth of 14.1% (outperforming our estimate of ~10.0% and industry’s 10.7% as at end-Feb14) due to continuing margin compression in NIM. YTD, NIM dipped 20bps from 2.4% to 2.2%. This declining trend is due to repayments of higher yielding loans such as Co-op loans. On a positive note, Cost of Funds (COF) has stabilised at 2.3%, as interest cost has been supported by sustained CASA deposits. CASA deposits grew 10.1% YoY, contributing to 34.0% of total deposits (vs. 33.6% in end-Mar13), which is higher than industry average of 26.7%.

 The strong growth in total loans was driven by targeting profitable consumer (+17.3% YoY) and domestic business enterprise (+21.5%) segments. This segmental loan includes share (+49.3%) and auto financing (+51.5%) as well as residential (14.9%) and non-residential (+27.8%) loans. Besides, lending to the construction sector also saw a 47.2% YoY growth but these loans only accounted for 1% of the total loans.

 Customer deposit growth of 9.0% YoY kept pace with loans expansion to maintain a healthy loansto-deposit ratio (LDR) of 82.1% (vs. 78.4% as at end-Mar13). We understand that the group is targeting to eventually raise LDR closer to 85.0% for more efficient balance sheet management and to be inline with the industry.

Key Results Highlights     Non-interest income declined marginally by RM1.0 million or 0.3% mainly due to lower investment income from Financial Markets. The Group saw lower investment income by RM12.6m compared to FY13 due to steepening of yield curves and lower gains from disposal of AFS by RM22.5m. Besides, in FY13, there were gains of RM23.2m from disposal of 30% stake in AIA-Takaful.

 Thus far, the non-interest income was mainly attributed to recurring income from transaction banking, wealth management, treasury and brokerage activities. All these income streams accounted for c.27% of the total income (about similar to FY13). It is always the management’s aspiration to drive this segmental income to contribute 30% of the total income.

 Cost-to-income ratio (CIR) continued to improve from 48.0% to 46.6% due to effective cost management. Operating overhead expenses declined 1.7% YoY, despite a one-off staff rationalisation cost of RM22.3m incurred in 1Q14. Excluding such cost, the CIR could have further improved to <45%.

 While the Group only registered lower (-44.4% YoY) loan impairment writebacks of RM13.6m vs. RM24.5m writebacks in FY13, this is still better-than-expected as compared to our estimate of 2bps loan loss charge. Nonetheless, loan loss coverage (LLC) improved to 92.7% from 82.5% in end-Mar13 inline with the improved gross impaired loan ratio (GIL) of 1.4% vs. 2.1% as at end-Mar13. We understand that the continued improvement in impaired loans is the result of continuing efforts to refine credit origination process, credit scoring models and intensify collection.

 Post dividend payment, CET1, Tier 1 and Total Capital ratios will stand firm at 10.38%, 11.43% and 13.67%, respectively. These ratios are way above the Basel III minimum requirement of 4.5%, 6.0% and 8.0% for calendar year 2015.

 ROE registered at 13.8% (which is similar to FY13). This ROE is slightly ahead of our estimate of 13.0%.

4Q14 vs. 3Q14

 4Q14 net profit grew 15.8% QoQ despite a moderate QoQ growth of 3.9% in Total Income due to: (i) writebacks of impaired loans of RM17.6m as opposed to an impairment charge of RM3.4m in 3Q14 and (ii) writebacks of impairment of assets of RM14.0m in 4Q14.

 Without these writebacks, the QoQ growth in net profit could have dipped into negative territory.

Outlook  While we expect some slowdown in the consumer space arising from tighter regulations and have imputed a milder loan growth of 9% in our FY15E numbers, the management continues to target a lowto-mid-teen growth rate in loans going forward. Apart from the consumer, especially mortgages, the Group will continue to explore targeted corporate and commercial loans as well as share margin financing. Coupled with an expectation of a moderating trend in NIM compression, the management expects net interest income to grow steadily. We reckon that the Group should be able to grow its net interest income at a pace of high single-digit.

 As for non-interest income, judging from its flat growth trend, we reckon that it could be an uphill task to achieve the management’s target of 30% contribution to total income. Thus far, we estimate that this income stream accounts for 25%-24% to total income for FY15-FY16, respectively.

 Going forward, we are more hopeful to see well-contained operating expenses to drive profitability. We understand that the management is targeting to improve its CIR ratio closer to the industry average of 45%-48%. We believe this is fairly achievable judging from the trend of CIR for the past 2 years. We estimate the ratio to register at 44%-43% in FY15-FY16.

 While there is no guidance over its credit cost, we believe the trend of writebacks should gradually reverse especially the LLC of the group which still remains below industry average of >100%. As such, we have factored in a conservative 5bps-10bps loan loss charge to our FY15-FY16 estimates.

 The Group has raised their dividend payout policy from 50% to 60%. As such, we have revised our DPS estimates to 24.0 sen-26.0 sen for FY15-FY16, translating into dividend yields of 5.4%-5.8%, respectively.

 With these dividend payouts, we believe it is not entirely impossible for the Group to achieve its ROE target of 14%-16% as per our ROE estimate of 14.6% for the next 2 financial years.

Change to Forecasts Taking the above-mentioned assumptions and rationales into consideration, we have revised our FY15 estimate from RM598.5m to RM626.6m (+11.5% YoY), representing a 5% earnings revision. We also introduce our FY16 net profit estimate of RM664.4 (+6.0% YoY).

Rating Maintain OUTPERFORM even after revising our TP lower as the stock still offers >15% in capital gains and decent dividend yield >5%.

Valuation  We lower our Target Price (TP) from RM5.62 previously to RM5.25 as we notice that the stock had derated from its historical higher end PBV of 1.9x to 1.6x-1.7x for the past 2 years.

 At our revised TP of RM5.25, we basically value the stock at 1.7x to FY15 BPS of RM3.02 or 12.3x to FY15 EPS of 40.5 sen.

Risks to Our Call   Tighter lending rules and further margin squeeze in general.

 The relatively low LLC ratio against the industry could be a threat to our credit cost assumptions.

Source: Kenanga