Period  2Q14/1H14

Actual vs. Expectations 2Q14 net profit of RM232.9m brought 1H14 net profit to RM429.6m.

 This is way above expectations, accounting for 63% and 65% of our forecast and street numbers, respectively.

 Higher gross impaired loans, however, suggests that some provisioning will be required moving forward (1H14: nil). Hence, 2H14 growth should trend lower.

Dividends  As anticipated, no dividend was declared since our last results note.

Key Results Highlights YoY, 1H14 net profit grew by 29.7% mainly due to an excellent 57.8% growth in net interest income to RM125.5m. Other income segments did not fare so well with Islamic banking operations coming in flat (+0.2%) and non-interest income registering a decline (-9.9%).

 The result was a smaller growth in total income of 6.1% to RM724.8m. Nevertheless, growth was buoyed at the net profit level given: (i) the absence of an impairment allowance (1H13: RM70.7m) and (ii) a 5.9% reduction in 1H14’s effective tax to 25.6%.

 Loan-to-deposit ratio retraced 3.8ppts to 109.4% as gross loans remained mostly flat (+0.7%) while deposits continued to grow (+4.2%).

 Asset quality deteriorated with gross impaired loans (GIL) ratio growing 2.3ppt to 7.5%. Coupled with the absence of provisioning, loan loss coverage (LLC) ratio plunged to 67.3% (-30.9bps).

 Meanwhile, annualised return on equity (ROE) continued to register a decline, dropping 10.4ppts to 27.6%.

 QoQ, 2Q14 net profit gained 18.4%, thanks largely to the doubling of net interest income to RM83.7m and non-interest income recording decent growth (+4.5%). Notwithstanding this, a slack in Islamic banking income resulted in total income only advancing by a marginal +1.1% to RM364.4m.

 However, 2Q14 net profit was ramped up on: (i) a fall in the cost-to-income ratio to 18.8% (-2.9ppts), and (ii) a write-back in provision which effectively offset the allowance in 1Q14.

Outlook  The group is in a transitional phase as its core retail segment of personal loans (73% of total loans) and mortgages (16.5% of total loans) have been hit by a slew of tightening measures.

 Expect diversification into corporate business lending which seems to be showing promising growth (1H14 disbursements: +15% YoY). Corporate loans stock at end-June 2014 stood at RM3.3b.

 Asset quality is still a concern, with a higher GIL ratio reported end-June 2014 and a lower LLC. This should warrant some provisioning in 2H14.

 Management, however, appears committed to enhancing its asset quality especially in the personal financing segment. Hence, the GIL ratio may improve.

Change to Forecasts  No changes to earnings.

Rating Maintain OUTPERFORM

 …as concerns over loans growth and asset quality have been priced in, with share price falling -10.2% from its 1-year high. This presents a buying opportunity.

Valuation  Our Target Price (TP) remains at RM2.65 (cum-rights at RM3.05), which was derived based on an unchanged price-to-book (PB) ratio of 1.5x, and a price-to-earnings (PE) ratio of 9.1x.

 The PB ratio applied is 2SD below the group’s 2-year mean in anticipation of lower ROE of 21.6% and 17.5% for FY14E and FY15E vis-a-vis its 3-year range of 34%-43%.

 The PE ratio, on the other hand, represents the group’s historical average PE ratio up to end-2013.

Risks to Our Call  Potential tighter regulations by the central bank.

 Higher credit cost arising from weaker asset quality.

 Higher credit risk as the Group has started to grow its loan book via industrial hire purchase and property-related projects.

Source: Kenanga