Investment Highlights

• We maintain our HOLD call on Hong Leong Bank (HLBB) but raised our fair value to RM18.10/share from RM16.70/share. Our revised fair value is based on a higher FY19 ROE of 10.2% (previously 10.0%) pegged to a P/BV of 1.5x. We have tweaked our net profit estimate for FY18/19/20 higher by 5.0%/6.2%/9.1% after factoring in higher NIM estimates and raised our estimate for share of profits from Bank of Chengdu (BOC). Also, we have lowered our loan growth assumptions to 4.0%/6.0% for FY18/19 with the new guidance from management.

• The group reported a 2QFY18 core net profit of RM683mil (+6.9%QoQ;+24.2%YoY). This led to 6MFY18 net profit of RM1.32bil (+21.0%YoY). The higher cumulative earnings were driven largely by a total income growth of 5.8%YoY, stronger contribution from its associate BOC, although partially offset by higher OPEX and provision.

• 6MFY18 net profit exceeded expectations, accounting for 57.7% of our projection. Against consensus numbers, it was within street estimates at 54.6% of FY18 net profit. The variance to our projection was due to higher-than-expected NII, lower provisions and higher share of profit from BOC.

• The group's loans decelerated to 1.8%YoY from 3.2%Y in the preceding quarter. This was contributed by a deceleration in the growth of retail and business enterprises' loans. Management has lowered its FY18 loan growth guidance to 3-4% from 5-6% previously.

• NIM remained stable at 2.13% in 2QFY18. For 6MFY18, NIM was higher by 8bps YoY, contributed by disciplined loan pricing and lower funding cost from active asset and liability management.

• Liquidity remained healthy with a gross LD ratio of 80.8%. LCR of the group was steady at 118.0% as at end-2QFY18, well above the regulatory requirement of 80.0% for 2017.

• The group continued to record a positive JAW (+2.6%) in 6MFY18. CI ratio improved to 42.5% for 6MFY18 vs. 43.6% in 6MFY17 benefiting from the digital transformation and cost management initiatives.

• Profit contribution from associate BOC surged by 117.7%YoY to RM273mil, making up 16.9% of the group’s PBT.

• Asset quality remained strong with a stable GIL ratio of 1.0%. For 6MFY18, net credit cost was stable at 0.09% below our estimate of 0.13%. Excluding recoveries, gross credit cost was 28bps for 6MFY18.

• An interim dividend of 16 sen/share has been proposed (payout: 24.8%) in 6MFY18. This was slightly higher than 6MFY17's 15 sen/share.

• Fully diluted group CET1 ratio continued to healthy at 12.5% while that for bank entity was 12.0%.

Source: AmInvest Research - 27 Feb 2018