• HLB’s 1QFY6/24 net profit (NP) was within expectations, at 26% of our fullyear forecast and 25% of the Bloomberg consensus estimate.

• HLB managed to maintain its NIM over the past two quarters as it capitalised on its low LD ratio to grow its loans at a faster pace than its deposits.

• Reiterate Add, given its above-industry loan growth and swift expansion of BOC contributions.

1QFY6/24 NP Within Expectations

Hong Leong Bank’s (HLB) 1QFY6/24 NP was within expectations, accounting for 26% of our full-year forecast and 25% of the Bloomberg consensus estimate. 1QFY24 NP grew by a decent 4.9% yoy, driven by a net write-back of RM51.1m in loan loss provisioning (LLP) in 1QFY24, compared to a provision of RM37.6m a year ago, and a 33.5% yoy surge in associate contribution from Bank of Chengdu (BOC).

Low LD Ratio Shields the Bank From Deposit Competition

While most local banks suffered from a qoq contraction in net interest margin (NIM) in 2QCY23 (and some in 3QCY23), HLB managed to sustain its NIM over the past two quarters, with qoq expansion of 1bp in each quarter. This was mainly achieved through its active asset-liability management, by growing its loans at a faster pace than the expansion in deposits. Its total deposits even contracted by 1% qoq in 1QFY24F. Going forward, it still has room to employ a similar strategy to fend off deposit competition as its loan-todeposit (LD) ratio of 86.1% at end-Sep 23 was significantly lower than the levels of more than 90% for most of other banks.

Outlook for 2QFY6/24F

HLB’s NP could dip below RM1bn in 2QFY24F to between RM980m and RM1bn, as we do not expect the net write-back in LLP in 1QFY24 to be sustainable. Based on this, NP would decline by 4-6% yoy in 2QFY24F, due to lower net and non-interest income and increased overheads.

Reiterate Add on HLB

We reiterate our Add call on HLB, premised on its one-of-the-best asset qualities and the lowest credit charge-off rate in the sector. The potential re-rating catalysts of aboveindustry loan growth and swift expansion in associate contributions from BOC (which grew by 33.5% yoy in 1QFY24). Downside risks to our Add call are contraction in NIM and deterioration in asset quality. We keep our FY24-26F EPS forecasts but raise our DDMbased target price (TP) from RM25.30 to RM26.30 (cost of equity of 9.5%; terminal growth rate of 4%) as we roll over our TP to end-CY24F.

Source: CGS-CIMB Research - 30 Nov 2023