Hong Leong Bank delivered 3QFY18 net profit of RM690m (+21.2% yoy; +1.0% qoq), in line with Affin but ahead of consensus (>5.4%). The group’s 9MFY18 results remain solid, underpinned by firmer operating income (+7.8% yoy, with stronger growth in non-interest income), while Bank of Chengdu’s earnings contribution (16.4% of 9MFY18 PBT) was up 67.3% yoy. Despite flat year-to-date loan growth, we expect improvement in FY19-20E as business confidence gradually turns more optimistic under the newly-installed ruling coalition. Reaffirm BUY with a higher PT of RM20.70 (based on 1.57x CY19E P/BV) from RM20.00.

3QFY18 Net Profit of RM690m (+21% Yoy; +1.0% Qoq)

Hong Leong Bank (HLB) reported a 9MFY18 net profit of RM2,012m (+21% yoy), with 3QFY18 coming in at RM690m (+21.2% yoy; +1% qoq). The favourable results came on the back of: i) 9MFY18 fund-based income growth (+6.1% yoy), +4bps NIM expansion to 2.12%; ii) stronger 9MFY18 non-interest income (+12.8% yoy); iii) lower impaired loan provisions (-31.4% yoy) and iv) a substantial 67.3% yoy growth in 18%-owned Bank of Chengdu (BOCD) profit contribution (accounting for 16.4% of group PBT). In line with the expansion in operating profit and cost-optimization measures simultaneously, HLB saw further expansion in its JAWS ratio to 4% (9MFY18). HLB’s balance sheet liquidity remains ample with a LCR of 134% and LDR of 81.3%, and this would continue to support future loan growth, although 9MFY18 has remained flat year-to-date (due to repayments). As asset quality remains sound (GIL ratio at 0.84%), the net credit cost also remained minimal at an annualized 7bps for 9MFY18.

Digital and Branch Transformation Initiatives to Drive Income Growth

We believe that near-term catalysts include lower overheads (management’s target of < 40% within next 3 years from 42.3% in 3QFY18) arising from its digitization strategies. 150 of its 295 branches will be well-equipped with state-of-the-art banking solutions (which should lead to lower maintenance and operating costs) under a transformation initiative.

Reaffirming Our BUY Call and Raising Our TP to RM20.70 From RM20.00

We Reaffirm Our BUY Call on HLB and Raise Our 12-month TP to RM20.70 (1.57x CY19E P/BV, based on CY19E ROE of 10.8%) from RM20.00 (1.63x CY18E P/BV). Downside risks: i) NIM pressure; ii) asset-quality issues.

Source: Affin Hwang Research - 31 May 2018