Hong Leong Bank - Weaker revenue in 2QFY19; softer income contribution from associate companies

Date: 27/02/2019

Source  :  AmInvest
Stock  :  HLBANK       Price Target  :  20.20      |      Price Call  :  HOLD
        Last Price  :  16.98      |      Upside/Downside  :  +3.22 (18.96%)

Investment Highlights

  • We maintain our HOLD call on Hong Leong Bank (HLBB) with an unchanged FV of RM20.20/share. Our FV is based on an FY19 ROE of 10.9%, leading to a P/BV of 1.6x. For housekeeping, we have tweaked our estimates for FY19/20/21 by 0.2%/0.1%/0.1% after adjusting our CI ratio and credit cost assumptions.
  • HLBB recorded a 2QFY19 core net profit of RM669mil (+5.5%QoQ) after excluding a further one-off gain of RM17.8mil from the sale of its 37.0% stake in a JV company, Sichuan Jincheng Consumer Finance Limited Company (JV co). The group has already recognised a gain of RM72.2mil from the disposal in 1QFY19.
  • 2QFY19 saw a weaker revenue offset by lower operating expenses (opex) and a write-back in provisions for loan impairments due to recoveries.
  • Core earnings for 6MFY19 of RM1.3bil (-1.4%YoY) came in within expectations, making up 48.2% of our and 47.5% of consensus estimates. ROE based on core net profit of 10.8% for 6MFY19 was in line with our projection of 10.9%.
  • The group’s loans gained traction and registered a higher growth of 4.8%YoY compared with 4.0%YoY in the preceding quarter. This was supported by growth in mortgages and SME loans.
  • NIM in 2QFY19 was stable at 1.98% amidst funding cost pressure from intense deposit competition. The group raised its base rate (BR) by 10bps in Jan 2019 which is expected counter the pressure on its cost of funds.
  • Opex grew 1.3%YoY in 6MFY19 underpinned by higher personal and marketing expenses. CI ratio based on core total income was 45.0% for 6MFY19 (43.3% based on reported numbers with the total divestment gains of RM90.1mil). Excluding the one-off gains, JAW was negative of 5.7% in 6MFY19.
  • 6MFY19 saw its 18.0% stake in Bank of Chengdu (BOC) and the remaining 12.0% in Sichuan Jincheng Consumer Finance Limited (now both associate companies) contributing a share of profit totalling RM280mil (- 0.8%YoY) which accounted for 17.7% of the group’s PBT (6MFY18: 17.5%) .
  • GIL ratio improved to 0.80%. Net credit cost was -0.06% in 6MFY19 (6MFY18: 0.09%) due to recoveries. Excluding recoveries, gross credit cost was 0.13% (13bps) for 6MFY19.
  • The group declared an interim dividend of 16 sen/share (payout: 25.2% based on core earnings) in 6MFY19. This was similar in quantum to the preceding year.

Source: AmInvest Research - 27 Feb 2019

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