Investment Highlights

• We upgrade Hong Leong Bank (HLBB) to BUY from HOLD and raise its fair value to RM16.50/share from RM15.30/share. This is based on a higher FY21 ROE of 9.7%, leading to a P/BV of 1.2x. Our earnings estimates for FY21/22 have been revised by +6.5%/+10.5% to account for higher loan growth and NIM assumptions. We have also adjusted our credit cost estimate slightly higher to 0.25%/0.20% for FY21/22.

• 4QFY20 core earnings of RM712mil, excluding the modification loss from the loan moratorium of RM142mil, surged by 33.1% QoQ. Core earnings in 12MFY20 rose 3.4% YoY to RM2.64bil after excluding the modification loss and the one-off gains of RM90mil from the partial divestment of its stake in a JV company, Sichuan Jincheng Consumer Finance Limited Company in 12MFY19. 12MFY20 profit came in within expectations, making up 103.7% and 104.6% of our and consensus estimate respectively.

• Loan growth decelerated to 6.1% YoY from 6.6% YoY in 3QFY20. Domestic loans growth was sustained at 5.9% YoY, higher than the industry’s 4.1%YoY supported by mortgages (residential property), SMEs and commercial banking loans.

• Normalised NIM in 4QFY20 rose by 8bps QoQ to 1.92% due to the repricing of deposits despite the OPR reduction of 50bps in May 2020.

• Underlying CI ratio for 12MFY20 was 42.9% with opex remained well controlled at 0.6% YoY.

• 12MFY20 saw its 18.0% stake in Bank of Chengdu (BOC) and the remaining 12.0% in Sichuan Jincheng Consumer Finance Limited’s (now both associate companies) share of profit of RM642.3mil (14.1% YoY) remaining strong. It accounted for 20.5% of the group’s underlying PBT.

• The group’s GIL ratio decreased to 0.61% from 0.98% in 3QFY20 due to borrowers who were entitled to the 6-month moratorium (Apr–Sept 2020) settling their loan arrears as well as due to loan write-offs.

• Credit cost rose to 0.52% in 4QFY20 (3Q20: 0.35%) with higher provisions from the increase in expected credit loss (ECL) buffers and forward-looking adjustments on top of the RM65mil taken for the impact of Covid-19 in 3Q20. This has resulted in 12MFY20 net credit cost of 0.22%.

• A final dividend of 20 sen has been proposed, bringing the full FY20 dividends to 36 sen/share. This represented a payout of 30.0% vs. FY19’s 38.0%.

Source: AmInvest Research - 1 Sept 2020