Malayan Banking Bhd
Oct 24 (RM9.70)
Maintain outperform with a target price of RM11.20: Bank International Indonesia (BII) reported a weak set of results with earnings for the first nine months of financial year 2014 (9MFY14) plunging 69% year-on-year.

The sharp decline in profit after tax of 69% can be attributed to: (i) mediocre income growth of 4%; (ii) higher operation expenditure (opex) of 15%; and (iii) higher loan loss provision of 153%.

Net interest margin (NIM) fell 43 percentage points (ppts) on the back of rising cost of funds. Loan-to-deposit ratio (LDR) surged to 94% (up 5ppts) as loans grew at a faster clip against deposits at 14% and 7%,respectively. To note, loan growth so far is below management’s target of 16% to 17% for FY14.

With an elevated opex due to a sharp increase in general and administrative expenses in the second quarter (2Q) of FY14, cost-to-income ratio (CIR) spiked up to 65% (up 2ppts).

Asset quality continues to slide given that: (i) gross impaired loan ratio increased to 2.5%; (ii) loan-loss coverage dropped to 48% (down 20ppts); and (iii) credit charge ratio rose to 2% (up 1ppt).

Annualised return on equity fell to 3.5% (down 10ppts) while regulatory capital ratios were stable.

Earnings declined 98% because income contracted 8% while loan loss provision increased 107%. LDR was flat at 94% as loans and deposits declined in tandem (down 2%). CIR fell 9ppts given stricter cost management.

Credit charge ratio increased to 3.1% from 1.5%, signalling a slight deterioration in asset quality.

Intense competition for deposits will continue to compress NIM as funding cost increases.

Rising inflation along with higher cost of borrowing may further exert pressure on asset quality.

Loan growth may be tepid going forward given uncertainties over the country’s policies as businesses and consumers adopt a wait-and-see approach before investing in the future. — Kenanga Research, Oct 24

This article first appeared in The Edge Financial Daily, on October 27, 2014.