Hong Leong Bank (HLB) reported a marginally weaker 9MFY19 core net profit (-2.8% yoy), while 9MFY19 headline net profit was flat yoy. Meanwhile, 3QFY19 results were lacklustre (-7.8% qoq) due to higher expenses and absence of net credit recoveries. Overall, HLB’s 9MFY19 earnings were within Affin and consensus estimates. HLB’s core operations continue to face headwinds due to a sharper rise in funding costs, which was also reflected in a 9MFY19 NIM compression of 14bps yoy. Earnings contribution from Bank of Chengdu is plateauing, implied by mediocre yoy growth. Management has further relaxed its loan-to-deposit ratio, allowing the limit to rise to 85% (from 82%), which is positive for its NIM. Reiterate HOLD with a revised TP of RM20.70.

9MFY19 Core Net Profit of RM1.95bn (-2.8% Yoy)

HLB saw a slightly weaker performance in 9MFY19, as core net profit of RM1,955.8m was down by 2.8% yoy due to weaker operating income (-2.9% yoy). This was primarily affected by ongoing NIM pressure (9MFY19 NIM down 14bps yoy to 1.98%) and rising funding costs as a result of the impact of the OPR hike last year, as well as strong growth in FDs and corporate deposits. Overall fund-based income was down 2.2% while noninterest income was 4.9% lower yoy. Nonetheless, credit recoveries in 9MFY19 (driven by some prudential provisions made in earlier quarters) helped to cushion a weaker pre-provision profit. Meanwhile, the contribution from Bank of Chengdu (BOCD), at 17% of 9MFY19 pre-tax profit, grew by 2.8% yoy.

Revision in Management’s Guidance on Loan-to-deposit Ratio (LDR)

HLB’s management, which has been conservative in maintaining its LDR limit at 82%, has further relaxed its limit to 85%. In our view, this would augur well for HLB’s fund-based income in the coming quarters and help to ease funding cost pressures.

Maintain HOLD; PT Revised to RM20.70 (rolling Over to CY20)

We rreiterate our HOLD rating with a slight revision in our Price Target from RM20.80 to RM20.70 (1.5x CY20E P/BV, CY20E ROE of 10.7%). In 2019, we remain cautious on business and consumer sentiment in the country, noting that domestic business activities are being affected by slower global growth and trade war tensions. HLB continues to leverage on its niche in the retail, business-banking and global markets, which have seen earnings sustained amidst a challenging market. Downside/upside risks: Further/lower NIM pressure.

Source: Affin Hwang Research - 29 May 2019