Investment Highlights

• We maintain BUY call on Hong Leong Bank (HLBB) with a slightly lower fair value of RM23.20/share from RM23.50/share. Our revised valuation is supported by a lower FY24F ROE of 12.3%, leading to a P/BV of 1.4x. No change to 4-star ESG rating, which we have accorded a 3% premium to our valuation.

• 9M23 underlying net profit was within expectations, making up 74.5% of our FY23F earnings and 76.2% of consensus’.

• However, we fine-tuned FY23F/24F/25F earnings by -2.3%/- 1.5%/-1.3% to factor in lower net interest margin (NIM) and loan growth assumptions.

• In 3Q23, the group reported a lower net profit of RM930mil (- 10.8% QoQ), contributed by a decline in net interest income (NII) from net interest margin (NIM) compression, higher operating expenses (opex) and provisions coupled with a lower share of profits from associate.

• For 9M23, underlying earnings were RM2.95bil (+14.9%YoY), supported by higher non-interest income (NOII), lower allowances for loan losses and an improved share of profits from associate.

• The group’s loan growth eased slightly to 7.2% YoY in 3Q23 (2Q23: 7.6% YoY) with domestic loans expanding by 6.2% YoY above the industry’s 5% YoY. Meanwhile, overseas loan growth moderated to 22% YoY, supported by the expansion of financing in Singapore, Cambodia, and Vietnam.

• Net interest margin (NIM) slipped by 27bps QoQ to 1.82% in 3Q23. 9M23 NIM of 2.03% fell by 13bps YoY. The compression in interest margin was contributed by higher funding cost from keen deposit competition and the impact of higher SRR cost of 2bps-3bps. NIM in 4Q23 is likely to improve on the back on the OPR hike of 25bps to 3% in May 2023 as well as the ease in FD campaign rates recently in the market, particularly the longer tenured deposits.

• CI ratio for 9M23 was stable at 37.6%.

• The share of associate profits from its 18% stake in BOC and the remaining 12% in Sichuan Jincheng Consumer Finance continued to be robust at RM951mil (+31.8% YoY). It accounted for 26.5% of the group’s underlying 9M23 PBT.

• Slight uptick in GIL ratio to 0.52% in 3Q23 vs. 0.49% in 2Q23. Net credit cost of 8bps (annualised) in 9M23 was within management’s guidance of 10bps for FY23.

Source: AmInvest Research - 1 Jun 2023