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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Thu, 19 Sep 2019, 9:37 AM

 

Hong Leong Bank Berhad - Relying on Asset Quality and BOCD

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Earnings improved due to divestment gains and credit recoveries, as NIM slid despite improving loans. Overseas contribution remained resilient. No change in our FY19E/FY20E numbers but TP lowered to RM20.05 (ascribing a lower target PBV) to account for the challenging environment ahead. Reiterate MARKET PERFORM call.

In line. 9M19 CNP of RM2.03b is inline, accounting for 75%/74% of our/market estimates. No dividend declared as expected.

Unexpected credit recoveries but top-line in negative territory. YoY, CNP of RM2,028m (+1%) was supported by unexpected credit recovery of RM35m (vs 9M18: -RM67m) and a RM90m gain; as top-line fell 3% to RM3,558m. Dismal top-line was dragged by both NII (-5%) and NOII (-5%), mitigated by improvement in Islamic banking income of +10% to RM532m. However, stripping off the RM90m gain in its divestment (in Sinchuan Jincheng Consumer Finance Co), NOII would have fallen by 14% and CNP by 4%. Despite strong loans (+6% vs system loans/expectations of 4.9%/5%)), NII was dragged by NIM compression (-13bps) as COF surged 30bps (vs asset pricing of +13bps). CIR of 44% (vs. industry’s 48%) is above guidance of <42% attributed to anaemic top-line. Its 18% associate BOCD continued to improve, at +4%, to RM421m contributing 17% of PBT. Asset quality maintained its positive momentum with GIL falling 4bps to 0.8% with credit recovery of 4bps (vs 9M18: credit charge of 7bps)

QoQ, CNP slipped by 8%, with the absence of credit recoveries (RM5m impairment allowance vs 2Q19 recoveries of 58m. Top-line rebounded (+2%) as both Islamic banking income and NOII surged ahead at +9% respectively, mitigating the fall in NII (-2%). Loan traction continued for the quarter by +10bps to 1.5% (vs +90bps in 2Q) but uptick in NIM was poor at +1bps. Asset quality was mixed to stable as GIL continued to be flat but a net credit charge of 1bps was seen as recoveries tapered (- 9%) for the quarter.

Traction in loans looks moderating; While loans saw continued traction, we believe the momentum will be moderating ahead given that the bulk of its loans (69%) are driven by retail which is seemingly moderating in 3Q. While NIM looks to be under pressure, management is confident of NIM target of >2% (or similar to FY18 at 2.1%) driven by improvement in higher yielding assets and its SME book. We remain positive on its NIM as its LDR and excess liquidity are at 82% and 18%, respectively.

Forward earnings maintained. As earnings are in line, we made no changes to our FY19E/FY20E earnings of RM2.69b/RM2.93b based on these conservative assumptions; (i) loans at~5% (unchanged), (ii) CIR at 43% (unchanged), (iii) 1bps compression in NIM (unchanged), and (iv) credit charge at 0.10% (from 0.12% previously).

TP lowered, and call maintained We reduced our TP to RM20.05 (from RM20.60) on a FY20E target PBV of 1.5x (from 1.7x) implying a +1.0SD above mean (from +2.0SD previously) to account for the challenging environment ahead both locally and domestically. Maintained at MARKET PERFORM.

The key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, and (iv) weaker-than expected contribution from BoCD.

Source: Kenanga Research - 29 May 2019

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