Highlights

Management conceived that 1H results were slightly behind KPIs but it will continue with the strategy of focusing on its niche (retail and SME), improve cross selling and improvement transactional fee income (which has shown consistent growth in 1H). It is confident that 2H performance will be on track to meet earnings and assets KPIs.

Loans growth is expected to sustain at around 13%. While the recent Budget measures will have an impact, it is not expected to be very material as transaction is expected to contract by circa 10% while its strong niche in the retail segment will help to mitigate. Although its SME loans growth was lagging in 1H (due to uncertainties about GE and Budget), management guiding for pick up in 2H.

With the unwinding of its cooperative loans (which has higher margin), NIM will continue under pressure. Nevertheless, its strong niche in SME and pricing discipline has resulted in higher margin from this segment which will partly help mitigate the impact.

Despite one-off rationalization charge of RM22.3m in 1H, overheads only grew 1.2%, well behind income growth (i.e. wider JAW). Post rationalization, overheads will be well contained which will help in sustaining earnings.

Management is not overly concerned about asset quality given stable economy and growth as well as full employment. It also does not expect any major issue in the retail segment.

Overall, we remained confident that management will deliver decent earnings growth. However, it has been fully reflected in the share price. Thus, keeping our HOLD rating on the stock.

Risks

Unexpected jump in impaired loans and lower than expected loan growth. Intense competition from much bigger players.

Forecasts

No changes.

Rating

HOLD

Positives – strong asset quality and deposit franchise (the latter helps in protecting NIM), strong niche in consumer and SME, potential M&A excitement and ample room for more active capital management. Transformation has resulted in strong loans growth (which used to be lagging but is now ahead of industry).

Negatives –

Stiff competition from significantly larger players with bigger scale and reach as well as relatively lower liquidity against peers.

Valuation

Target price maintained at RM4.91 based on Gordon Growth with ROE of 13.4% and WACC of 10.1%.

Source:Hong Leong Investment Bank Research - 3 Dec 2013