Investment Highlights

• We maintain our HOLD call on Hong Leong Bank with an unchanged fair value of RM20.20/share supported by FY19 ROE of 10.9%, pegging the stock to a P/BV of 1.6x. The stock has already reflected a premium in its valuation for its strong asset quality (well collateralised loans) and consumer banking franchise without significant exposures to the more vulnerable larger corporates. No changes to our estimates.

• We met group CFO Foong Pik Yee for updates on the group recently. 1) We gather that after 4QFY18, the group has ceased offering promotional rates for longer term FDs, particularly the 12-month tenure deposits. It has already locked in some of the longer term FDs in 3Q and 4QFY18. With the group’s NSFR already exceeded the minimum requirement of 100.0%, it is now focusing on tapping the shorter term FDs which are lower in rates compared to the 12-month tenure deposits. Currently, the group is running FD campaigns on the shorter tenure deposits. 2) Pressure from deposit competition still persists with the sector moving closer to the adoption of the NSFR. In the near term, there is likely to be a need to match the deposit rates of its competitors. This is particularly when other banks offer more attractive FD rates through campaigns. Hence, defending its existing FDs from attrition will also be a key focus. Any effort to prevent a run-off of deposits by countering the rates of its competitors is expected to exert some pressure on the group’s funding cost. The group has maintained its guidance for FY19 NIM of above 2.0%.

• The group has adopted MFRS 9 on 1 July 2018. There is no change to the management’s guidance of a day 1 impact of 13bps drop to its CET1 ratio from implementing the standard.

• Its associate, Bank of Chengdu (BOC) will adopt FRS 9 on 1 Jan 2019. With prudential provisioning already taken by BOC earlier resulting in a high loan loss cover of 232.0%, the impact from the adoption of the standard is expected to be manageable. We expect the see the impact on BOC reflected in HLB’s 4QFY19 results. We understand that the provincial commercial bank has not experienced any impact from the US-China trade spat.

• 1QFY19 loan growth is expected to improve from that in 4QFY18. Momentum for retail loans is likely to be better supported by an acceleration in residential property and HP loans. Meanwhile, the smaller SME (GSME) loans are also gaining traction.

• We expect the group’s NOII to be either holding up or slightly improved in 1QFY19 vs. 4QFY18. Fee income in the coming quarter’s results is expected to be decent supported by wealth management income while the client FX transactions are expected to improve with the market continuing to be volatile.

• The group continues to guide for a gross credit cost of 20-25bps in FY19. Overall asset quality continues to be stable. Asset quality of its overseas operations is holding up after the impairment of a loan account in Singapore in 3QFY18 and two accounts in Cambodia in the 4QFY18.

Source: AmInvest Research - 9 Oct 2018