HLBK’s 3QFY18 performance was ahead of expectation. Lower-than-expected credit cost and lumpy trading gains were the key upside surprises. Maintain HOLD with a higher target price of RM19.90 (1.63x FY19F P/B, 10.5% ROE) post earnings forecast revision. Despite a relatively solid earnings performance, we believe current valuations at 14.4x FY19F PE and 1.52x FY19F P/B fully reflect the scarcity premium associated with the stock’s solid asset quality franchise. Entry level: RM18.00.

RESULTS

• Above – Boosted by lower provisions and lumpy trading gains. 3QFY18 earnings of RM690.1m (+21.2% yoy and +1.1% qoq) were 8% and 12% above consensus and our estimates respectively. Key areas of positive earnings surprises were: a) lower than expected net credit cost of at 4bp vs our estimate of 9bp; and b) a lumpy net trading gain of RM121.8m from financial derivative instruments vs RM14.2m in 3QFY17. However, net interest income and fee income trends were weak with net interest income contracting 1.8% yoy on the back of a 3bp compression in NIM despite the recent 25bp OPR hike due to higher-than-expected funding cost from aggressive fixed deposit build-up. Fee income expanded a modest 1.1% yoy with lower credit card fee income (-6.5% yoy) being a key drag. As such, we note that 3QFY18’s PPOP growth of 17.1% yoy may not be sustainable given that it was driven largely by volatile trading income.
• Loans growth below targets. 9MFY18 annualised loans growth was relatively sluggish, expanding 0.3% yoy and flattish qoq in the period. The drag came from working capital loans (-6.8% yoy), auto loans (-4.5% yoy). Mortgage was the only key loans growth driver (+7.8% yoy). However this comes at the expense of structurally lower yields and hence NIM. Management is now targeting slower loans growth of 3% (vs initial 4% to 5%) due to potentially weaker-than-expected corporate loans pipeline.
• Asset quality remains intact. The group reported a 13.1% qoq decline in gross impaired loans (GIL) balance resulting in GIL ratio declining to 0.84% in 3QFY18 vs 0.97% in 2QFY18. The stable asset quality trend coupled with lumpy recoveries in 3QFY18 resulted in significantly lower net credit cost of 4bp in 3QFY18 and 7.0p for 9MFY18 (the group’s LLC inclusive of regulatory reserve remained stable at 151% in 3QFY18 which does indicate that there should be minimal capital impact on the group upon the adoption of MFRS9 (-20bp). The group will be adopting MFRS9 in FY19.
• Bank of Chengdu earnings growth trend plateauing but remains commendable. Bank of Chengdu registered a 16.5% yoy earnings growth on the back of lower provisions as its GIL ratio declined 39bp to 1.69%. That said, we note that yoy growth from Bank of Chengdu has moderated to 16.5% in 3QFY18 vs 9MFY18’s 67% yoy growth on the back of a higher base effect. Moving into FY19, we are forecasting a much milder 11% yoy growth in Bank of Chengdu’s contribution to HLBank vs 52% yoy growth for FY18 as provision trends normalises while loans growth remains tepid at 4.0% yoy.

EARNINGS REVISION/RISK

Factoring in 3QFY18’s lumpy trading gains and lower credit cost given the stronger-thanexpected asset quality trends, we raise our FY18/19/20 earnings forecasts by 5.8%/4.2%/4.5% respectively.

VALUATION

Maintain HOLD with higher target price of RM19.90 (1.63x FY19F P/B, 10.5% ROE) post earnings revision. Despite a relatively solid earnings performance, we believe current valuations at 14.4x FY19F PE and 1.52x FY19F P/B have fully reflected the scarcity premium associated to the stock’s solid asset quality and liquidity franchise. Note that the sector average P/B is at a lower 1.40x P/B despite generating similar ROE levels as HLBank.

Source: UOB Kay Hian Research - 31 May 2018