Investment Highlights

• We maintain our HOLD call on Hong Leong Bank (HLBB) with a lower fair value of RM15.00/share (previously RM15.20/share). Our fair value is based on a lower FY18 ROE of 9.7% (from 10.3%), leading to a P/BV of 1.3x. We tweaked our net profit for FY18/FY19F lower by 7.3%/7.4% after factoring in higher credit cost and CI ratio assumptions.

• HLBB recorded a core net profit of RM585mil (+2.7%QoQ) after adjusting a one-off tax expense of RM102mil on a subsidiary company whose earlier tax deduction claims have been disallowed. This led to a 12MFY17 core earnings of RM2.25bil (+10.5%YoY). The improvement in cumulative earnings was supported by healthy operating income growth, higher contribution of profit from its associate in China, BOC and Sinchuan Jincheng Consumer Finance JV, but partially offset by higher provisions. Cumulative earnings were within expectations, making up 102.2% of our and 101.0% of consensus estimates.

• Loan growth in 4QFY17 remained soft. It decelerated further to 3.8%YoY from 3.9%YoY in the preceding quarter. This was due to a slowdown in growth of retail loans while momentum of loans to business enterprises stayed soft. Growth in SME loans slipped further to 6.0%YoY. Domestic loan growth was 3.8%YoY and continued to be behind the industry's 5.7%YoY.

• 4QFY17 saw the group's NIM remaining stable at 2.14%. For 12MFY17, the group's NIM rose 15bps YoY to 2.09%, contributed by its management of funding cost and disciplined loan pricing.

• Liquidity continued to be healthy and stable with a net LDR at80.4% (gross LD ratio: 81.2%). Customer deposit growth picked up pace slightly from the preceding quarter with a growth of 4.5%YoY. The group's LCR and NSFR remained above 100.0%. CASA ratio was stable at 25.0%.

• Revenue continued to outpace its normalised OPEX growth, resulting in a positive JAW of 4.1% for 12MFY17. 12MFY17 CI ratio improved to 44.1% against a normalised 12MFY16 CI ratio of 45.8% (excluding MSS expenses in 2QFY16 of RM172mil). The group's CI ratio came in above our estimate of 43.0%.

• Share of profit from associate, Bank of Chengdu (BOC) fell 10.4%QoQ in 4QFY17. Nevertheless for 12MFY17, the group's share of profit from BOC increased by 9.8%YoY, making up 12.5% the group’s PBT.

• There continues to be upticks in group GIL ratio for the 4Qto 0.96% in 4QFY17. Provisions for loan impairments rose 206.4%YoY in 12MFY17 attributed to higher collective and individual allowances, partially offset by a rise in loan recoveries. This has resulted in a higher credit cost of 0.13% (12MFY16: 0.04%), which was higher than our assumption of 0.10% for FY17.

• A single tier interim dividend of 30 sen/share was declared.

• Fully diluted group CET1 ratio continued to healthy at 12.7% while that for the bank entity was 12.0%.

Source: AmInvest Research - 25 Aug 2017