Hong Leong Bank’s solid 1QFY19 headline net profit of RM706.9m was however propped up by a non-recurring divestment gain of RM72.2m. Otherwise, normalized 1QFY19 net profit was relatively flat yoy and qoq. On an annualized basis, results came in below Affin’s and street estimates by circa 10% arising from weaker fund-based income generation (due to funding cost pressure). Key positives during the quarter include robust non-interest income growth, a lower cost-toincome ratio (at 42% vs. 43% in 1QFY18) and minimal credit cost of 6bps. The transition to the MFRS9 standard has resulted in minimal changes to capital ratios on Day-1 of adoption. We downgrade our rating from Buy to HOLD, with a lower PT of RM20.80 based on a 1.6x P/BV target, as we revise FY19-21E earnings lower by 5.7-5.8%.

1QFY19 Core Net Profit of RM634.7m (-0.7% Yoy; +1.4% Qoq)

Although Hong Leong Bank (HLB) announced a robust 1QFY19 headline net profit at RM706.9m (+10.6% yoy), on a core earnings basis, RM634.7m, results were below Affin’s and consensus estimates by circa 10% (on an annualized basis). 1QFY19’s key drivers includes stronger growth in noninterest income (+36.4% yoy), decline in allowances (-55% yoy) and sustained profit contribution from Bank of Chengdu (BOCD) at RM145m (-2.0% yoy). On the other hand, fund-based income declined by 3.4% yoy despite seeing positive traction in loan growth (+4.0% yoy) as funding pressure mounted (due to deposit competition and repricing of OPR). Hence, NIM declined by 15bps yoy to 1.98%, while on a qoq basis, down 5bps.

FY19E-21E Net Profit Revised Down by 5.8%/5.7%/5.7%

We revise down our FY19E/20E/21E net profit by 5.8%/5.7%/5.7% as we account for higher funding cost for HLB. This resulted in a lower NIM assumption of 2.0% from 2.1% previously.

Downgrade to HOLD. PT Revised to RM20.80 (from RM23.00)

Subsequent to our downward earnings revision, our Price Target has been lowered to RM20.80 (1.6x CY19E P/BV, CY19E ROE of 10.7%) from RM23.00. We downgrade our rating from BUY to HOLD. In 2019, we anticipate potentially improving business and consumer confidence in the country following the announcement of recent government policies. HLB continues to leverage on its niche in the retail and business-banking segments, of which had seen positive growth rates of 3.5-4.0% yoy. Downside/upside risks: Further/ease in NIM pressure.

Source: Affin Hwang Research - 29 Nov 2018