Period  1Q14

Actual vs. Expectations The reported 1Q14 net profit of RM1,601.6m accounted for 24% of our FY14 full-year estimate of RM6,685.3m but only 23% of the consensus estimate of RM6,870.0m.

 Annualised 1Q14 ROE of 13.8% is inline with our ROE estimate of 14.2%.

Dividends  None, as expected

Key Results Highlights

1Q14 vs. 1Q13

 On a YoY basis, total income of the group grew at a marginal rate of 2.4% driven by higher fund-based income, including Islamic Banking Income, at 7.6% on the back of 13.5% YoY growth in total loan (inline with our expectation of 13.1%). However, the growth was eroded by decline in fee income (by 8.3% YoY), owing to weaker investment banking and treasury activities.

 While share of domestic loans declined from 63.2% of total loan in 1Q13 to 61.2% in 1Q14, it still grew 9.8% YoY. Overseas loans grew at a stronger pace of 19.9%. Judging from the results, the underlying loan growth was still driven by loans to individual/household. These loans accounted for 45% of the total loans and grew at a decent rate of 13.4%. While business enterprises accounted for another 40% of the total loans, they grew at a slower rate of 10.2% as the growth was dragged down by a much slower growth of 3.1% in SMEs. Inline with industry's general lending directions, the group also saw aggressive lending for working capital (+33.7%), purchase of securities (+17.3%), purchase of non-residential properties (+15.7%) and purchase of residential properties (+13.3%).

 Net interest margin (NIM) saw a 12bps contraction YoY, which is not a surprise as opposed to management guidance of c.10bps reduction.

 Customer deposits grew at a slight lower rate of 11.3% YoY, hence liquidity was tighter pushing loan-to-deposit ratio (LDR) higher to 92.5% vs. 90.7% in 1Q13. Nonetheless, we are not overly concerned as low-cost deposits (CASA) grew at a faster rate of 14.2%.

 Despite recording well-controlled operating expenses (+0.5% YoY) with cost-to-income ratio (CIR) at 48.9% vs. 49.8% in 1Q13, the operating profitability of the Group was further dampened by higher (+>100% YoY) loan-loss charge of RM210.m vs. RM86.0m in 1Q13, representing an annualised credit cost of 23bps in contrast to 11bps in 1Q13. Again, we were not surprised for such a trend and also estimated that credit cost should be registered at approximately 23bps despite the continued improving asset quality. With the higher allowances for loan loss, loan loss coverage (LLC) has now improved to 107.2%, which is inline with industry average, as compared with 99.0% in 1Q13. Gross Impaired Loan (GIL) ratio had improved to 1.52% rom 1.88% in 1Q13, but it was a slight deterioration contrary to 4Q13 of 1.48%.

 Nonetheless, net writebacks of impairment losses on financial investments of RM114.7m (vs. RM2.4m in 3M13) managed to pull the PBT higher and still showing a growth of 3.8% YoY.

Key Results Highlight Con’d  Coupled with lower effective minority interest of 1.5% to PBT (vs. 4.0% in 1Q13), net profit of the Group grew 6.3%. However, annualised ROE was lower at 13.6% as opposed to 14.1% in 1Q13 due to a larger equity base arising from a 10% share placement exercise done in 2013.

 As such, the banking Group remains well capitalised with Tier 1 and Total Capital ratios stood at 12.5% and 15.3% as at end-Mar14, vs. 12.1% and 14.9%, respectively, as at end-Mar13.

1Q14 vs. 4Q13

 In a nutshell, we saw a QoQ decline across both top and bottom lines despite lower operating cost of 7.1%. Total Income declined 5.3% QoQ, PBT slid 4.1% and net profit lower by 7.5%.

 While the weaker top lines could be due to the seasonally weaker 1H contrary to 2H, we also saw a RM210.1m impaired loan allowance in 1Q14 as opposed to writebacks of impaired loan of RM54.5m in 4Q13. However, the higher impaired loan allowance in 1Q14 is cushioned by writebacks of impairment losses on financial investments of RM114.7m in contrast to provisions of impairment in financial investments of RM104.1m in 4Q13.

Outlook  While 1Q14 results were able to meet market expectations and that of ours, there is still concern over the FY14 prospects as per the weaker QoQ numbers.

 However, the management seems to be still fairly optimistic over FY14 outlook with tall targets of 13% growth in both loans and deposits. At the same time, the management also guided for: (i) NIM to further contract by 10bps, (ii) credit charge-off rate at ~10bps and (iii) CIR to range between 47% and 48%. Besides, the management also maintains its ROE target at 15%, which could be an uphill task in our view. We believe a 14% ROE will be a more achievable target.

Change to Forecasts  No changes to our forecasts. We still maintain our FY14-FY15 net profit estimates of RM6,680.6m-RM7,539.2m.

Rating   Upgrade our rating from MARKET PERFORM to OUTPERFORM after revising our TP.

Valuation  We revise our Target Price (TP) to RM11.20 from RM10.40 after rolling over our valuation base year to FY15.

 Our TP is based on a 3-year average PBV of 2.0x and a 3-year average PER of 13.5x over our FY15 EPS and BPS of 86.4sen and RM5.76, respectively.

Risks to Our Call  (i) Tighter lending rules and slower loan growth, (ii) Slower-than-expected implementation of ETP projects, (iii) Keener competitions and hence further margin squeeze; and (iii) sharp turn in NPLs hence higher credit charge.

Source: Kenanga