Investment Highlights

• We maintain our HOLD call on Hong Leong Bank (HLBB) with a revised FV of RM20.50/share (from RM20.20). Our FV is based on an FY20 ROE of 10.6% leading to a P/BV of 1.5x. We have rolled over our valuation to FY20. Our earnings for FY19 have been trimmed slightly by 1.7% to reflect a higher cost of funds.

• HLBB recorded a 3QFY19 core net profit of RM634mil (- 5.3% QoQ) due to higher operating expenses (opex) and net provision for loan impairment compared with a net impairment write-back in the preceding quarter.

• Core earnings for 9MFY19 of RM1.94bil (-0.3% YoY) after stripping out a RM90.1mil gain from the disposal of its 37.0% stake in Sichuan Jincheng Consumer Finance Limited Company (JV Co) came in within expectations, making up 71.6% of our and 70.4% of consensus estimates. The ROE based on core net profit of 10.6% for 9MFY19 was slightly lower than our projection of 10.9% for the full FY19.

• The group’s loans gained traction and registered a higher growth of 6.5% YoY vs. the industry’s 4.9% YoY. This was supported by growth in mortgages (residential property), SME as well as higher overseas loans driven by Cambodia and Vietnam.

• NIM in 3QFY19 was stable at 2.00%. For 9MFY19, the group’s NIM fell 14bps YoY to 1.98% largely due to higher funding cost.

• Opex was well controlled with only a marginal growth of 0.8% YoY in 9MFY19. CI ratio based on core total income was 45.0% for 9MFY19 (43.9% based on reported numbers with the total divestment gains of RM90.1mil). Excluding the one-off gains, JAW was negative 6.1% in 9MFY19.

• 9MFY19 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 RM421mil (+0.5% YoY) which accounted for 17.8% of the group’s PBT (9MFY18: 17.0%).

• An uptick in impaired loans by 2.6%QoQ was due to an impaired S$23mil personal loan in Singapore. Nevertheless, GIL ratio was stable at 0.80%. Net credit cost was -0.03% in 9MFY19 (9MFY18: 0.07%) due to lower provisions for expected losses. Excluding recoveries, gross credit cost was 0.13% (13bps) for 9MFY19.

• Capital ratios were healthy with group CET1 ratio of 12.6%.

Source: AmInvest Research - 29 May 2019