Investment Highlights

• We maintain our BUY call on Hong Leong Bank (HLBB) with a reduced FV of RM15.60/share from RM15.90/share. This is based on a lower FY21 ROE of 9.4%, leading to a P/BV of 1.1x. Our earnings estimates for FY20/21/22 have been trimmed by 4.6%/2.5%/5.2% to account for higher credit cost of 0.15% (previously 0.08%) in FY20 as well as our adjustment of higher CI ratios to 44.0%/43.0%/41.0%.

• 3QFY20 earnings of RM535mil declined 23.8% QoQ. Core earnings in 9MFY20 was flat at -0.7% YoY to RM1.93bil 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 9MFY19. Cumulative profit came in within expectations, making up 71.6% of ours and 74.2% of consensus estimates.

• Loan growth decelerated to 6.6% YoY from 7.3% YoY in 2QFY20. Domestic loans grew 5.9% YoY and continued to outpace the industry which recorded a 4.0% 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 3QFY20 fell by 20bps QoQ to 1.84% attributed to 2 rate cuts of 25bps each in Jan and Mar 2020.

• Opex remained well controlled with the marginal growth of 1.4% YoY resulting in a CI ratio of 44.2% for 9MFY20.

• 9MFY20 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 RM478mil (+13.4% YoY) which accounted for 20.4% of the group’s PBT.

• Gross impaired loans rose by 18.8% QoQ or RM221mil in 3QFY20. The group’s GIL ratio increased to 0.98% from 0.84% in 2QFY20. Nevertheless, we understand that in 4QFY20, HLBB’s GIL ratio will normalise to the percentage seen in 2QFY20. This is due the group’s initiative to encourage borrowers to settle arrears for loans which are entitled to the moratorium.

• Credit cost rose to 0.35% in 3QFY20 due to a preemptive provisioning of RM65mil taken for the impact of Covid-19. This has resulted in a YTD net credit cost of 0.13%, higher than our estimate of 0.08% for FY20.

Source: AmInvest Research - 1 Jun 2020