Investment Highlights

• We maintain our BUY call on Hong Leong Bank (HLBB) with an unchanged FV of RM18.90/share based on FY20 ROE of 10.4% leading to a P/BV of 1.4x. We continue to see upside potential with the stock now trading at a low 1.2x FY20 PB, below its historical mean of 1.5x. We fine-tune our earnings estimates for FY20/21/22 by 2.7%/-0.8%/-0.8% as we adjust our projections for net interest income (NII).

• 1QFY20 earnings of RM689mil grew 8.5% YoY after excluding one-off gains of RM72mil from the partial divestment of its stake in its JV, Sichuan Jincheng Consumer Finance Limited Company in 1QFY19. The improvement was underpinned by a core total income growth of 3.3% YoY supported by higher net interest income (NII) and non-interest income (NOII), coupled with write-backs in loan impairments compared to provision for loan losses in 1Q19. Core earnings in 1QFY20 came in line within expectations, making up 25.5% of our and 25.3% of consensus estimates. ROE based on core net profit was 10.7%.

• The pace of loan growth improved slightly to 6.8% YoY in 1QFY20 compared to 6.6% YoY in 4QFY19. Domestic loan growth of 6.6% YoY continued to outpace the industry’s 3.8% YoY growth. Loan expansion was mainly supported by mortgages (residential property), SME as well as overseas loans driven by Cambodia and Vietnam.

• NIM in 1Q20 recovered by 14bps QoQ to 2.03% attributed to lower funding cost from the repricing for deposits after the 25bps OPR cut in May 2019.

• Opex continued to be well controlled with a marginal decline of 0.6% YoY in 1QFY20. CI ratio based on total income was 43.0% in line with our estimate for FY20.

• 1QFY20 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 RM145mil (-1.3% YoY) which accounted for 17.1% of the group’s PBT (1QFY19: 17.3%).

• Impaired loans recorded a slight uptick of 4.9% QoQ or RM53mil leading to a marginal rise in GIL ratio to 0.81% in 1QFY20 from 0.78% in 4QFY19. Net credit cost was -0.03% in 1QFY20 (1Q19: 0.06%) due to lower expected losses from improving asset quality. Excluding recoveries, gross credit cost was 0.13% for 1Q20.

• Capital ratios remained healthy based on the group and bank entity CET1 ratios of 12.8% and 12.4% respectively.

Source: AmInvest Research - 28 Nov 2019