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 FY19 ROE of 10.9% leading to a P/BV of 1.6x. For housekeeping, we have tweaked our net profit estimates for FY20/21 by -0.6/-1.6 after lowering our NIM assumptions.

• HLBB recorded a 1QFY19 core net profit of RM635mil (- 2.8%QoQ; -0.7%YoY) after excluding a one-off gain of RM72.2mil from the partial divestment of its stake in a JV company, Sichuan Jincheng Consumer Finance Limited Company (JV co). It has completed the divestment of 37.0% of its shareholdings in the JV co. The group now owns only 12.0% vs. 49.0% previously of the company. This has resulted in a reclassification from an investment in a JV to an associate company. The group will continue to account for its share of profits for its remaining stake in the company through equity accounting.

• Core earnings came in within expectations, making up 23.5% of our and 22.9% of consensus estimates.

• The group’s loan grew 4.0%YoY compared to 3.1%YoY in the preceding quarter. This was supported by growth in mortgages, loans to business enterprises and better momentum for overseas loans.

• NIM in 1QFY19 contracted by 5bps QoQ to 1.98%. This was due to higher funding cost from intense deposit competition over the past one year.

• Opex grew by 3.6%YoY in 1QFY19 underpinned by higher personal and marketing expenses. CI ratio based on core total income was 44.6% for 1QFY19 (42.0% based on reported numbers with the divestment gain of RM72.2mil). Excluding the one-off gain, JAW was -3.7% in 1QFY19.

• 1QFY19 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) share of profits totalling RM147mil accounting for 17.3% of group PBT (1QFY18: 19.5%) .

• GIL ratio improved to 0.81%. Net credit cost stayed low at 0.06% in 1QFY19 (1QFY18: 0.14%). Excluding recoveries, gross credit cost was 0.24% (24bps) vs. 0.31% in 1QFY18.

• The group has implemented the MFRS 9 and the Day 1 impact has been manageable. The Day 1 of the adoption of the new standard saw provisions increase by RM365mil (+36.0% vs. guidance of an increase of 25.0%). Nevertheless, the decline to CET1 and Tier 1 capital ratios of both 10bps to 12.5% and 13.2% respectively was within management’s guidance. Day 1 impact on its regulatory reserves was minimal while its shareholders’ funds were enhanced slightly by 0.4% with gains from the remeasurement of equity investments (unrealised gains on financial assets at FVTPL of RM341.9mil)

Source: AmInvest Research - 29 Nov 2018