Investment Highlights

• We upgrade our call on Hong Leong Bank (HLBB) to BUY from HOLD with a revised FV of RM18.90/share (from RM20.50/share). Our FV is based on a lower FY20 ROE of 10.2%, leading to a P/BV of 1.4x. We see upside potential after the steep decline in its share price, with the stock now trading at a low 1.2x FY20 PB, below its historical mean of 1.5x. Our earnings for FY20/21 have been trimmed by 5.7%/3.5% to reflect higher CI ratio assumptions and to factor in another OPR cut of 25bps in 2H2019.

• HLBB recorded a flattish 4Q19 core net profit of RM636mil (+0.4% QoQ) with a subdued total income, coupled with higher operating expenses and provisions for loan impairments.

• Core earnings for 12M19 of RM2.55bil (-1.8%YoY) after stripping out gains of RM90.1mil from the disposal of its 37.0% stake in Sichuan Jincheng Consumer Finance Limited Company (JV Co) and RM25.0mil from sale of Visa shares came in within expectations, making up 95.8% of our and 94.0% of consensus estimates. The ROE based on core net profit is 10.3% for 12M19 compared with our projection of 10.7%.

• The group’s loans picked up pace with a higher growth of 6.6% YoY (3Q19: 6.5% YoY) vs. the industry’s 4.2% YoY. Loan growth was supported by mortgages (residential property), HP, SME as well as overseas loans driven by Cambodia and Vietnam.

• NIM in 4Q19 slipped 11bps QoQ to 1.89%. For 12M19, the group’s NIM declined 14bps YoY to 1.96%, attributed to higher funding cost coupled with the impact from the 25bps cut in OPR in May 2019.

• Opex was well controlled with only a marginal growth of 1.5% YoY in 12M19. CI ratio based on core total income was 45.4% for 12M19 (44.3% based on reported numbers).

• 12M19 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 of RM563mil (+4.9%YoY), accounting for 17.7% of the group’s PBT (12M18: 16.5%).

• Stable impaired loans QoQ led to an improvement in GIL ratio to 0.78%. Net credit cost was 0.01% in 12M19 (12M18: 0.06%) due to lower provisions for expected losses. Excluding recoveries, 12M19 gross credit cost was 0.16%.

• A final dividend of 34 sen/share has been declared, bringing the total dividends to 50 sen/share for FY19 (payout: 38.0%) close to the estimated 51.9 sen/share.

Source: AmInvest Research - 29 Aug 2019