A Positive Start for FY18; Robust Yoy Growth

Hong Leong Bank reported a 1QFY18 net profit of RM639m (+17.8% yoy; +9.2% qoq on a core basis), in line with Affin’s estimates but outperforming the street. Operationally, HLB continued to stand out with robust NIM expansion (+12bps yoy) while Bank of Chengdu’s earnings contribution was up 65.6% yoy. 1QFY18 ROE rose by +1ppt to 11.1% given the good set of results. HLB is poised for stronger performance in FY18- 20E as it leverages on its ample balance sheet liquidity (LCR 119%; LDR 81.8%) to fuel loan growth while reaping synergies from its on-going digital and branch transformation initiatives. Maintain BUY and PT of RM17.00 (based on 1.38x CY18E P/BV). Given the good set of results, we believe that this will prompt further street upgrades and may positively rerate the stock.

1QFY18 Net Profit of RM639m (+17.8% Yoy) Surprised the Market

Hong Leong Bank (HLB) reported a 1QFY18 net profit of RM639m (+17.8% yoy; +9.2% on a core basis) underpinned by: i) stronger fund-based income growth (+9.8% yoy), +12bps increase in NIM to 2.13% and loan growth of +3.2% yoy; and ii) substantially higher contribution from 20%-owned Bank of Chengdu (BOCD), whereby profits were up 65.6% yoy while making up 19% of group PBT. The Group experienced a positive JAWS ratio of 4.16% yoy and 3.9% qoq, whereby operating income growth continued to outpace operating expense growth. With prudent cost management, its cost-to-income ratio (CIR) had declined marginally to 43% in 1QFY18 CIR at 43% vs. 1QFY17 at 44.8%. With sound credit quality, credit cost has been minimal at 14bps in 1QFY18 (though higher than 7bps in 1QFY17). BOCD is expected to come back strongly in FY18E given the focus to expand further loan growth activities while asset quality is expected to remain sound, with a benign GIL ratio of 2%.

Digital and Branch Transformation Initiatives to Drive Income Growth

HLB has been on an aggressive digital drive since 2014 and is currently in the process of transforming and rationalizing its 150 branches (out of 295 in total) to be more well-equipped with state-of-the-art banking solutions while redeploying staff for more value-added marketing roles.

Maintain BUY With Price Target of RM17.00

We maintain our BUY rating on HLB at our price target of RM17.00 (1.38x CY18E P/BV, based on CY18E ROE of 10.6%). Our key assumptions: i) FY18E loan growth at 6.6%, FY19-20E at 5.8-5.9%; ii) NIM expansion of +10bps in FY18E to c.2.1% driven by higher loan yields and lower funding cost. Downside risks: i) NIM pressure; ii) asset-quality issues.

Source: Affin Hwang Research - 4 Dec 2017