· BCHB’s 1HFY10 net profit of RM1,277m was inline with our net profit estimate of RM2,537m and that of consensus’ RM2,303m at 50% and 55% respectively. Strong 2Q investment and equity related revenues of RM403m (16.8% QoQ) were the basis of strong earning growth. BCHB's Investment bank posted record quarterly revenues of RM775m driven by very strong treasury and investment divisions’ performance. Top line growth combined with a stable cost income ratio (53%) produced a solid 14.5% ROE for the quarter. Asset quality still benign with low net NPL ratio of 2.4%. YTD loan increased by 4.5% are on track to achieve its year end target of 8%.
· Net profit in the second quarter was RM663mn or 18.8 sen a share – the best quarter since 2007, when it was hammered by the financial crisis. We have expected strong earnings, but were surprised by the exuberance performance. The primary earnings driver was prime brokerage and forex trading. Going forward, earning momentum remain strong with the recovery of bond market i.e. the propose USD1.5bn Emas Dollar Sukuk Bond and highly likely RM3-4bn listing of Maxis.
· We see the company showing greater resilience than its peers. Given that the bank has been less severely impacted than its global peers, we believe the market is pricing in its strong performance. But investors should not lose sight of the fact that key operating and financial trends appear to be more resilient in 2QFY09 and further room to grow with expectations of a strong capital market, volatility in forex market and low interest environment.
· BCHB’s shares is undemanding on FY10 ROE of 16% - The combination of BCHB’s strong investment banking business, coupled with its growing Indonesian presence in Rupiah lending business, positioned it very favourably to deliver above-average earnings growth and an ROE 14% by FY09 and 16% by FY10. We look at a few alternative valuation methodologies and conclude that BCHB remains undervalued and reiterate our Buy rating (see report dated 14th July 2009 titled ‘Buy Maintained’ for details).
· Maintaining BUY Recommendation with target price of RM11.60 –Upward rerating catalyst would be the securing of large IB deals which will yield significant non-interest income. BCHB is trading at 1.6x FY10 P/BV which is below our price/book versus regression model that is consistent with BCHB achieving the upper end of management’s goals of 12-16% ROE goal for 2009-10.
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