Investment Highlights

• We maintain our BUY call on Hong Leong Bank (HLBB) with a revised FV of RM23.10/share from RM23.20/share. Our FV is supported by FY23F ROE of 11.6%, leading to P/BV of 1.4x. No change to our 4-star ESG rating, which we have accorded a 3% premium to our valuation.

• Earlier China’s Chengdu was reported to be locked down for 2 weeks due to Covid-19. Since then, the lockdown measure has been lifted and it is now BAU for Bank of Chengdu (BOC), the associate company of HLBB. Nevertheless, owing to the continuing supply chain disruptions while lockdowns and travel restrictions are imposed in certain cities of China in line with its zero-Covid policy, we have lowered our FY23F/24F/25F earnings by 2.8%/6.3%/3.3% to account for lower share of profits from associate companies.

• Recall in 4Q22, HLBB has an outstanding balance of preemptive impairment buffers amounting to RM629mil which have yet to be allocated to any loan portfolio.

• We expect the percentage of loans under the payment relief assistance plans (PRAP) to continue tapering from RM4.3bil or 2.6% of the group’s total gross loans in July 2022. With a sustained outstanding balance of pre-emptive provision buffers and decline in loans under PRAP, the group’s credit cost in 1Q23 is likely to come in within the guided 10-15bps for FY23F.

• No write backs of pre-emptive provision buffers are expected in the near term. On loans that are under PRAPs, the borrowers’ prompt repayments will be observed for periods of 6 months before provisions are reversed out. In contrast, on loans with repeated PRAPs, the observation period could take at least 12 months.

• The amount of loans where borrowers have applied for PRAPs repeatedly have been trending downwards.

• Stronger NIM is expected in 1Q23 vs. 2.1% in 4Q22. The improvement will be underpinned by higher interest income from OPR hikes, investments in securities and optimisation of funding cost.
  1Q23 saw 2 OPR increase (July and Sept 2022) of 25bps each vs. 1 (+25bps) in 4Q22 (May 2022). 
  We expect another 25bps OPR hike in the upcoming MPC meeting in Nov 2022 and a further 25bps increase in Jan 2023. This would normalise the OPR to 3.00%, the pre-pandemic level. Recall, every 25bps hike in OPR will provide an uplift of 4bps to the HLBB’s NIM.
• Based on media reporting, speculation has been rife for another moratorium to be granted to SME loan borrowers. We do not expect this to occur and banks are likely to continue with the targeted approach in loan rescheduling and restructuring for borrowers that require repayment assistance. With the challenging economic conditions stemming from higher commodity prices and weaker domestic currency impacting raw materials cost, a slight uptick in impairments of the smaller/micro SME loans could not be discounted. We expect HLBB’s overall asset quality to remain healthy with comfort taken on its 85% security coverage for SME loans.
• The group reported a GIL ratio of 0.49% in 4Q22. Looking ahead, the ratio is expected to be stable with a mild uptick at most.

• In line with BNM’s Climate Change and Principle-based Taxonomy (CCPT) classification for economic activities, only 5% or RM2.2bil of the group’s business banking financing falls under the higher risk C4 and C5 categories. RM44.4bil business banking loans accounted for the remaining 95% under CCPT C1 to C3. The top 3 sectors (manufacturing, transportation & storage coupled with the electricity, steam, gas and air-condition supply) made up 88% or RM1.9bil of the group’s total business banking credit exposures under C4 and C5.
  On financial investments, RM9.5bil of the group’s bonds which represented >99% of the total bond holdings were within the classifications of C1 to C3. Less than 1% of HLBB’ bonds (exposure to the electricity, gas, water, mining and quarrying sectors) were classified under the higher risk C4 and C5 categories.

• Challenges on non-interest income (NOII) continues to be seen in the near term with softer trading and investment income due to the volatile markets. However, the stronger wealth management and credit card related fees from higher consumer spend are expected to help to partly cushion the drop in treasury income.

• As at end of Sept 2022, foreign shareholdings for the stock were 10.65%, slightly higher compared to 10.33% in June 2022.

• The group’s 1Q23 results are scheduled to be released on 29 Nov. We expect 1Q23 net profit to be decent, supported by continued strong loan momentum and improved NIM coupled with no surprises to credit cost from higher provisions.

• The stock is currently trading at an attractive P/BV of 1.2x, below its 5 years historical average of 1.4x with a dividend yield of 4% for FY23F.

Source: AmInvest Research - 20 Oct 2022