Investment Highlights

• We maintain our BUY call on Hong Leong Bank (HLBB). We lower our FV to RM17.50/share from RM18.90/share. This is based on FY21 ROE of 10.0%, leading to a P/BV of 1.2x. We roll over our valuation to FY21 and we continue to see upside potential on the stock which is now trading at a low 1.0x FY21 PB/V. Our earnings estimates for FY20/21/22 have been trimmed by 1.4%/2.4%/2.7% as we pencilled in another OPR cut of 25bps in FY20. Our earnings estimates have already taken into account the impact of a total 50bps cut in OPR for FY20, including the 22 Jan 2020 OPR reduction of 25bps.

• 2Q20 earnings of RM702mil grew 1.9% QoQ. Core earnings in 6M20 rose by 6.6%YoY to RM1.39bil after excluding one-off gains of RM90mil from the partial divestment of its stake in a JV company, Sichuan Jincheng Consumer Finance Limited Company in 6M19. Cumulative profit came in within expectations, making up 50.7% of our and 51.3% of consensus estimates. ROE based on core net profit for 6M20 was 10.8%.

• Loan growth accelerated to 7.3% YoY in 2Q20 from 6.8% YoY in 1Q20. Domestic loans grew of 6.8% YoY and continued to outpace that of the industry which recorded a 3.9% YoY growth. Loan expansion for the group was mainly supported by mortgages (residential property), SMEs as well as overseas loans driven by Cambodia, Vietnam and Singapore.

• NIM in 2Q20 improved by 1bps QoQ to 2.04% attributed to lower funding cost from further repricing of deposits to lower rates after the 25bps OPR cut in May 2019.

• Opex (+1.3%YoY) continued to be well controlled. CI ratio based on total income was 42.8% for 6M20 in line with our estimate for FY20.

• 6M20 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 RM312mil (+11.3% YoY) which accounted for 18.3% of the group’s PBT.

• A slight uptick in impaired loans by 5.0% QoQ or RM56mil led to an increase in GIL ratio to 0.84% in 2Q20. Net credit cost was 0.02% in 6M20. Excluding recoveries, gross credit cost was 0.18% for 6M20.

• An interim dividend of 16 sen/share has been announced (payout: 23.6%).

Source: AmInvest Research - 27 Feb 2020