Investment Highlights

• We maintain our HOLD call on Hong Leong Bank (HLBB) but raised our fair value to RM20.20/share from RM19.50/share. Our revised fair value is based on an FY19 ROE of 10.9% (previously: 10.7%) pegging the stock to a P/BV of 1.6x. We fine-tune our FY18/19 net profit by -0.4%/- 1.9% as we lower our assumptions for loan growth and profit contribution from its associate, Bank of Chengdu (BOC) as well as tweaked our credit cost estimates.

• HLBB delivered a 4QFY18 core net profit of RM653mil (+4.9%QoQ; +35.2%YoY) after adding back the one-off loss of RM27mil from the dilution of stake in BOC. Recall that the listing of BOC has reduced its stake in the associate from 19.9% to 18.0%. 12MFY18 core earnings of RM2.59bil grew 15.6%YoY underpinned by higher total income, lower provisions and higher share of profit from BOC. Cumulative earnings came in within expectations, making up 101.4% of our and 100.6% of consensus estimates.

• The group’s loan growth picked up momentum in 4QFY18. It accelerated to 3.1%YoY vs. 1.6%YoY in the preceding quarter. Loan growth continued to be driven by mortgage and SME loans. Both domestic and international loan growth improved compared to 3QFY18.

• NIM in 4QFY18 fell by 7bps QoQ to 2.03%. This was due to higher funding cost arising from the upward repricing of deposit rates adjusting to the OPR hike of 25bps in Jan 2018 and higher cost for wholesale deposits.

• It recorded a positive JAW of 3.7% for FY18 with total income growing faster than OPEX. Its CI ratio based on core income improved to 42.9% for 12MFY18 (42.6% based on reported numbers)

• Profit contribution from associate BOC slowed down in 4QFY18, declining by 14.9%YoY to RM112mil, making up 14.4% of the group’s PBT. For the 12MFY18, contribution from BOC rose 50.5%YoY to RM516mil (contributing 15.9% of group PBT)

• GIL ratio inched up to 0.87% from 0.84% due to upticks in impairments of mortgage and HP loans. Credit cost stayed low at 0.06% vs. our expectation of 0.10% for FY18. Excluding recoveries, gross credit cost was 0.24% (24bps) for FY18.

• A final dividend of 32 sen/share has been declared leading to total dividend of 48 sen/share (payout: 37.0%) in FY18 (FY17: 45 sen/share; payout: 43.0%) which was close to our estimate of 50 sen/share.

• Fully diluted group CET1 ratio continued to be healthy at 12.6%. The group will implement MFRS 9 on 1 July 2018. The indicative day-1 impact of the adoption of the new standard will be a 13bps fall in CET ratio and a 14bps drop in Tier 1 capital ratio. Provisions will increase by 25% but this will be cushioned by its regulatory reserves resulting in a minimal impact on the group’s retained earnings.

Source: AmInvest Research - 29 Aug 2018