Hong Leong Bank - Slightly Weaker Operating Results

Date: 27/02/2019

Source  :  Affin Hwang Capital
Stock  :  HLBANK       Price Target  :  20.80      |      Price Call  :  HOLD
        Last Price  :  16.98      |      Upside/Downside  :  +3.82 (22.50%)

Hong Leong Bank (HLB) reported a relatively flat 1HFY19 core net profit on a yoy basis, while the 1HFY19 headline net profit was up 5.5% yoy driven by net disposal gains of RM72.2m and credit recoveries. The results are in line with Affin’s and consensus estimates. Notably, we see some weakness in the core operations, as fund-based income for the period (1HFY19: -3.2% yoy) was dampened by NIM pressure (down 15bps yoy) given aggressive deposit campaigns. Loan growth as at 2QFY19 was 4.8% yoy and was funded by deposit growth of 4.7% yoy. We also note that earnings contribution from Bank of Chengdu is plateauing, implied by flat yoy growth. HLB has proposed a 1st interim DPS of 16 sen. Reiterate HOLD with an unchanged price target of RM20.80.

1HFY19 Core Net Profit of RM1.32bn (flat Yoy)

HLB saw a relatively flat 1HFY19 core net profit of RM1,322m, affected by slightly weaker operating results due to ongoing NIM pressure (1HFY19 NIM down 15bps yoy to 1.98%). This was reflected more prominently at the net interest income line, which declined by 5.7% yoy as funding cost pressure mounted due to aggressive deposit campaigns. The slightly weaker 1HFY19 pre-provision operating profit (-2.1% yoy) was mitigated by credit recoveries in 2QFY19 (driven by some prudential provisions made in earlier quarters). Meanwhile, contribution from Bank of Chengdu (BOCD) at 17.6% of 1HFY19 pre-tax profit, grew by 1.8% yoy.

Associate Bank of Chengdu’s Contribution Plateuing

We note the the growth of BOCD appears to be tapering off, though stil stable. Nonetheless, the bank continued to perform well against industry benchmarks, with the 2018 ROE at 16% vs. the industry’s 13.2% and a GIL ratio of 1.54% (vs. the industry’s 1.87%).

Maintain HOLD. PT Unchanged at RM20.80

We reiterate our HOLD rating with our Price Target unchanged at RM20.80

(1.6x CY19E P/BV, CY19E ROE of 10.7%). In 2019, we anticipate potentially improving business and consumer confidence in the country following the announcement of recent government policies. HLB continues to leverage on its niche in the retail and business-banking segments, which had seen positive growth rates of 3.5-4.0% yoy. Nonetheless, our concern is largely centred on more NIM pressure in the next 6-12 months from aggressive deposit drives. Downside/upside risks: Further/lower NIM pressure.

Source: Affin Hwang Research - 27 Feb 2019

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