Investment Highlights

• We maintain our HOLD call on Hong Leong Bank (HLBB) with an unchanged fair value of RM15.00/share. Our fair value is based on FY18 ROE of 9.7%, leading to a P/BV of 1.3x. We make no changes to our estimates.

• HLBB recorded a core net profit of RM639mil (+17.8%YoY).It was a strong 1QFY18 earnings driven by a healthy operating income with NII rising due to higher NIM while NOII was stable as well as supported by a stronger contribution of profits from its associate in China, Bank of Chengdu (BOC). Nevertheless, the improvements were partially offset by higher opex and provisions. Cumulative earnings were within expectations, making up 27.8% of our and 26.9% of consensus estimates.

• Loan growth in 1QFY18 remained modest. It decelerated further to 3.2%YoY from 3.8%YoY in the preceding quarter. Growth of retail loans and loans to business enterprises moderated. In contrast, SME loans picked up pace. Domestic loan growth slowed down to 2.8%YoY while growth in overseas operations loan continued to trend lowerto10.9%YoY.

• 1QFY18 saw the group's NIM remain stable QoQ at 2.13%. On a YoY basis, NIM improved 12bps YoY contributed by management of funding cost and disciplined loan pricing.

• Liquidity continued to stay healthy with a stable gross LD ratio of 81.8%, which was lower than the industry’s. Customer deposit growth moderated to 2.8%YoY. The group's LCR and NSFR were 119.0% and 117.0% respectively, well above the minimum requirements of 100.0%. CASA ratio improved to 26.8%.

• The group continued to record a positive JAW (4.1%) for 1QFY18. 1QFY18 CI ratio declined to 43.0% vs. 44.8% in 1QFY17, and was in line with our estimate.

• Share of profit from associate, Bank of Chengdu (BOC) climbed 65.6%YoY to RM147.8mil from an improved loan growth, lower loan impairment and higher treasury investment income, making up 18.9% of the group’s PBT.

• The group’s GIL ratio inched higher to 0.98% in 1QFY18 with a much lower uptick in impaired loans compared to the preceding quarter. Provisions for loan impairments was 88.2%YoY higher in 1QFY18 attributed to higher collective allowance and lower recoveries, partially offset by lower individual allowances. Net credit cost was 0.14% in 1QFY18 vs. 0.08% in 1QFY18, in line with our estimate.

• Based on the group’s position as at August 2017 and an early assessment impact, the adoption of MFRS 9 would have a day 1 impact of 22-25bps on the group’s CET1 ratio. This appears to be manageable, and not significantly affecting the capital position of the group.

• Fully diluted group CET1 ratio continued to healthy at 12.3% while that for bank entity was 11.7%.

Source: AmInvest Research - 4 Dec 2017