Hong Leong Bank’s 4QFY18 net profit of RM626m moderated qoq by 9.3% (caused by higher funding cost), though was up +7% yoy (on a normalized basis). Full year FY18 results were in-line with Affin and street estimates. Key drivers for FY18 include a firmer pre-provision operating profit (+9.3% yoy), underpinned by non-interest income (+13.5% yoy), fund-based income (+4.0% yoy) and a 47.4% yoy growth in associates/JV contribution. We expect business confidence to turn more optimistic in FY19-21E driven by a potential roll-out of business-friendly policies under the new government. Reaffirm BUY with a revised PT of RM23.00 (1.76x CY19E P/BV) from RM20.70. A final DPS of 32 sen was proposed.

FY18 Net Profit at RM2,638m (+23% Yoy); Core Net Profit +17.4%yoy

Hong Leong Bank (HLB) reported a record year, with FY18 headline net profit at RM2,638m (+23% yoy). Results were in-line with Affin and consensus estimates. Key drivers for FY18 include a firmer pre-provision operating profit (+9.3% yoy), underpinned by stronger growth in non-interest income (+13.5% yoy), fund-based income expansion (+4.0% yoy) and a 47.4% yoy growth in both 19%-owned Bank of Chengdu (BOCD) and JV contributions. NIM has stayed flat at 2.1% in FY18 (vs. FY17) while cost-to-income ratio (CIR) for FY18 improved to 42.6% (against 44.1% in FY17) arising from increased operating efficiencies (from digitization) and strategic cost management initiatives. As asset quality remains sound (GIL ratio at 0.87% in FY18 vs. 0.96% in FY17), the net credit cost also came in at a minimal 6bps for FY18.

4QFY18 saw net profit down by 9.3% qoq, but we remain optimistic ahead

Altough 4QFY18 net profit was down by 9.3% qoq, as funding cost crept up due to repricing of deposits after the OPR hike and additional sub-debt. Nonetheless, we remain optimistic in the year ahead for HLB driven by a potential roll-out of more business friendly policies under the new regime while business confidence is expected to pick up (as reflected by a stronger loanbook expansion of 2.9% qoq – in mortgages, SMEs).

Reaffirming Our BUY Call, PT Raised to RM23.00 From RM20.70

We reaffirm our BUY call on HLB. We raise our Price Target from RM20.70 (1.57x CY19E P/BV, CY19E ROE of 10.8%) to RM23.00 (1.76x CY19E P/BV, based on a higher CY19E ROE of 11.3%). This came on the back of a +3% earnings revision for FY19-20E as we factor in more robust contribution by BOCD to HLB, with a 5% yoy growth based on recent quarters strong earnings. Downside risks: i) NIM pressure; ii) asset-quality issues.

Source: Affin Hwang Research - 29 Aug 2018