Hong Leong Bank, a top sector and country pick, delivered 2Q FY18 net profit of RM683m (+24.2% yoy; +6.9% qoq), in line with Affin but ahead of consensus for a second consecutive quarter. The group continues to generate solid 1H FY18 operating income (+5.8% yoy), while Bank of Chengdu’s earnings contribution was up 111.7% yoy. Though loan growth remains subdued as at December 2017 (+1.8% yoy), we believe it could potentially accelerate in FY19-20E given HLB’s ample balance sheet liquidity (LCR 118%; LDR 80.8%) to fuel loan growth. Meanwhile, its digitization strategies and branch transformation initiatives could also lead to lower overhead (target of < 40% within next 3 years). Reaffirm BUY call and raise TP to RM20.00 (based on 1.62x CY18E P/BV), from RM18.50.

2Q FY18 Net Profit of RM683m (+24% Yoy; +6.9% Qoq)

Hong Leong Bank (HLB) reported a 1H FY18 net profit of RM1,322m (+21% yoy), underpinned by strong performance in 2Q FY18 (+24% yoy; +6.9% qoq). The favourable results came on the back of: i) 1H FY18 fund-based income growth (+8.3% yoy), +8bps NIM expansion to 2.13%; ii) marginally lower 1H FY18 non-interest income (-1.1% yoy); and iii) substantially higher contribution from 18%-owned Bank of Chengdu (BOCD), whereby profits were up 111.7% yoy while making up 19% of group PBT. The Group experienced a positive JAWS ratio of 2.6% against last year, as operating income growth outpaced operating expense growth (1H FY18 cost-to-income ratio at 42.5% from 43.6% last year). With sound credit quality, credit cost has stayed low at 17bps for 1H FY18. BOCD is expected to see better earnings performance in FY18E given the focus to expand 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 is in the midst of transforming and rationalizing its 150 branches (out of 295 in total) to be more well-equipped with state-of-the-art banking solutions, which in our view, will lead to lower maintenance costs. HLB, being the first financial institution in Malaysia to roll-out the WeChat Pay system in Malaysia is expected to earn additional fee income from this initiative.

Reaffirming Our BUY Call and Raising Our TP to RM20.00 From RM18.50

We reaffirm our BUY call on HLB and raise our 12-month TP to RM20.00 (1.62x CY18E P/BV, based on CY18E ROE of 11%) from RM18.50 (1.5x CY18E P/BV) as we lift our FY18-20E earnings by 3-6% to factor in a 25bps OPR hike and lower operating expenses due to cost savings from branch rationalization initiatives. Downside risks: i) NIM pressure; ii) asset-quality issues.

Source: Affin Hwang Research - 27 Feb 2018