Investment Highlights

• We maintain our BUY call on Hong Leong Bank (HLBB) with an unchanged FV of RM18.90/share. Our FV is based on an FY20 ROE of 10.2%, leading to a P/BV of 1.4x. No changes to our earnings estimates. The stock is now trading at 1.2x FY20 P/BV which is lower than its historical mean of 1.4x.

• We met the management of HLBB for updates recently. Recall, in 4Q19, the group’s NIM contracted by 11bps QoQ to 1.89% largely due to the OPR cut of 25bps in May 2019. We understand that the group did not hold campaigns for longer tenure FDs earlier. Hence, the repricing of deposits to adjust to the lower OPR is expected to be faster in pace compared with some of its peers. 1Q20 is likely to see part of the deposit repricing trickling in with the bulk of the adjustments materialising by 2Q20. Hence, 1Q20 NIM is anticipated to be slightly improved from the 4Q19.

• Management hinted the possibility of another OPR cut of 25bps in 3Q20. In contrast, we are expecting the 25bps OPR reduction to happen sooner in 2H19 or 2Q20 of HLBB’s financial year. On a comforting note, by the time of the occurrence of the second rate cut, banks’ margins would have largely recovered from the first OPR reduction. The spacing out of the rate cuts will result in a softer negative impact on banks’ earnings. Depending on the actual time of the occurrence of the rate cut, typically an OPR cut of 25bps will impact the group’s NIM by 2–3bps. The group has on 10 Sep 2019 redeemed RM500mil of its Innovative Tier 1 Capital Securities (IT1CS) with a coupon rate of 8.25% p.a. The temporary deferment of the issuance of securities to replace the IT1CS redeemed will provide some interest cost savings to buffer against the second OPR cut of 25bps.

• We are keeping our FY20 loan growth assumption of 5.0% which is within management’s guidance of 5.0–6.0%. The pipeline for residential properties financing remains strong, amounting to more than RM10bil which will be supportive of the group’s loan growth. Meanwhile, growth in the community SME loan book continued to be healthy. On SMEs, the group remains focused on supply chain financing (financing ecosystem).

• Opex is likely to remain controlled and we are expecting a CI ratio of 43.0% for FY20.

• With an improved NIM, stronger domestic loan growth relative to the industry, stable asset quality and expectation of the share of profit from its associate, Bank of Chengdu to sustain, we expect the group to still record decent earnings for the upcoming 1Q20 results.

• The group recorded a low GIL ratio to 0.78% in 4Q19. Despite upticks in loans impairments seen for several segments, particularly the manufacturing, construction and household sectors based on BNM’ statistics, we gather that the group’s impaired loans remained stable with no alarming increase of impairments. We understand that the group has minimal loan exposure to the construction sector and less than 3.0% of exposure to the commodity sector. The group is also expected to maintain a stable credit cost (FY20: 8bps). Stage 2 expected credit losses (ECL) for loans under the MFRS 9 were lower in July and Aug 2019 vs. June 2019.

• The collateral coverage for the group’s SME loans is circa 80.0%. 52.0% of the group’s residential property loans are for financing of properties between RM250,000 and RM700,000. First-time home buyers accounted for 81.0% of the group’s residential property loans, a reflection of mostly owner-occupied rather than properties acquired for investments.

Source: AmInvest Research - 7 Oct 2019