Operations sustained by retail banking

HLB’s 1QFY17 net profit saw a 7.9% yoy (-2.8% qoq) improvement, driven by expanded operating profit (retail banking and treasury) and a higher international contribution. NIM improved while asset quality remained intact. Results were however below our expectations. Maintain HOLD, PT adjusted downward to RM13.00 from RM13.30.

1QFY17 net earnings up 7.9% yoy, below Affin’s expectations

Hong Leong Bank’s (HLB) 1QFY17 net profit rose by 7.9% yoy (but was down 2.8% qoq, as net credit recoveries reversed) to RM542.6m as preprovision operating profit (PPOP) saw a more robust expansion of 8.0% yoy (driven by retail banking and Treasury). Contributions from associates and the JV gave another boost to the bottom line (+11.7% yoy, +12% qoq). The 1QFY17 results, which represented 22% of our FY17 forecast, were below our expectations (but within consensus) due to lower-than-expected fund-based income, though our forecasts on impaired loan allowances are more conservative. Highlights of the 1QFY17 results include: i) NIM improvement of 7bps yoy and 6bps qoq to 2.01%, driven by effective loan pricing and funding cost management (compared to a NIM compression trend among peers); and ii) 11% yoy growth in non-interest income (realized trading and investment gains).

Marginal uptick of 5bps in GIL ratio to 0.84%, but not concerning

HLB’s gross impaired loan (GIL) ratio saw a 5bps uptick from 0.79% in 4QFY16 to 0.84% in 1QFY17, as gross impaired loans grew by 6% qoq due to a corporate account (under R&R, fully collateralized), personal loans and auto loans. In our view, there is no cause to be concerned.

Maintain HOLD; price target revised down to RM13.00 from RM13.30

We maintain our HOLD rating on HLB at our revised 12M PT of RM13.00 (equivalent to a 1.18x P/BV multiple, based on a FY17E’s ROE of 10.4%) from RM13.30 as we revise down FY17-19E earnings by 6.9-9.6%, driven by slower loan growth (4.3-4.6% yoy) and a potential contraction in NIM to around 1.92%. We remain neutral on the group’s outlook, as FY17 is expected to see a marginal EPS growth due to less upbeat domestic sentiment although supported by improving overseas contribution (11-12% of pre-tax profit). Downside risks: i) slowdown in economic growth; and ii) asset-quality issues. Upside risks: i) higher impaired loan recoveries; ii) increased revenue from reinvestments/redeployment of MSS cost-savings.

Source: Affin Hwang Research - 23 Nov 2016