Investment Highlights

• We maintain our HOLD call on Hong Leong Bank (HLBB) and raised our fair value to RM19.50/share from RM18.80/share. Our revised fair value is based on a higher FY19 ROE of 10.7% (previously: 10.2%), pegging the stock to an unchanged P/BV of 1.6x. We raised our net profit estimates for FY18/19/20 by 6.6%/5.3%/5.3% to account for lower credit cost of 0.10% for FY18 (previously: 0.13%). Also, we have also imputed lower tax rates for FY18/19/20.

• 3QFY18 core net profit after stripping out a one-off gain from the sale of VISA shares of RM68mil was RM622mil (- 8.9%QoQ; +9.2%YoY). This led to a 9MFY18 core earnings of RM1.94bil (+17.0%YoY). The increase in cumulative earnings was driven by a higher total income, well contained rise in OPEX, stronger contribution from its associate Bank of Chengdu (BOC) and lower provisions, partially offset by higher taxes.

• 9MFY18 core net profit was within expectations, making up of 80.7% our and 76.4% of consensus estimates.

• The group's loans remained slow at 1.6%YoY compared to 1.8%YoY in the preceding quarter. Retail and SME loans were slower in the quarter. Domestic loan growth was 1.8%YoY but this was partially offset by a contraction in international loans of 2.8%YoY.

• NIM fell by 3bps QoQ to 2.10% in 3QFY18 despite a 25bps OPR increase in January 2018. This was due to a higher funding cost arising from promotional FD rates offered to lock in rates just before the OPR hike. Liquidity remained healthy with a gross LD ratio of 80.8%. LCR of the group was steady at 134.0% as at the end of 3QFY18, well above the regulatory requirement of 90.0% for 2018. The group’s NSFR was also above 100%.

• The group continued to record a positive JAW with a stronger growth in total income than OPEX. The CI ratio based on core income improved to 43.1% for 9MFY18 (42.3% based on reported numbers), benefiting from digital and cost management initiatives. We gather that the increase in digital transactions have resulted in savings of 3% to the group’s cost base.

• Profit contribution from associate BOC remained strong, rising by 67.3%YoY to RM404mil. This was in line with our estimate, making up 16.4% of the group’s PBT.

• Asset quality remained strong with a lower GIL ratio of 0.84%. For 9MFY18, net credit cost was stable at 0.07% which continued to be below our estimate of 0.13%. Excluding recoveries, gross credit cost was 27bps for 9MFY18.

• No dividends have been declared in 3QFY18.

Source: AmInvest Research - 31 May 2018