HLB’s FY19 earnings were within Affin’s and consensus estimates. The group reported a relatively flat 4QFY19, +1.7% yoy and flat qoq. For FY19 core net profit of RM2.57bn was -2.4% yoy, while the headline net profit of RM2.66bn was +1.0% yoy (bolstered by a non-recurring disposal gain and a lower effective tax rate). Overall, the lacklustre FY19 results was primarily impacted by weaker fund-based income. HLB’s core operations continue to face headwinds due to higher funding cost attributable to deposit competition in 2018, coupled with an overall weaker domestic revenue growth. Earnings contribution from Bank of Chengdu (17.4% of group pre-tax profit) remains healthy, with a 7.4% yoy growth. We revise down FY20E-21E net profit by 6.0-6.3% to account for lower adjustments in fund-based and non-interest income. Reiterate HOLD, with a revised price target of RM18.50 (from RM20.70).

FY19 Core Net Profit -1.7% Yoy; Weaker Operating Income the Culprit

HLB saw a FY19 core net profit of RM2,574.5m (-1.7% yoy), while headline net profit came in at RM2,664.5m (+1.0% yoy) due to a lower effective tax rate and a RM90m disposal gain. FY19 operating income declined by 2.4% yoy as a result of a 2.9% yoy lower fund-based income, arising from stronger funding cost pressure. This was reflected in a full year NIM compression of 14bps yoy to 1.96%. 4QFY19 NIM was worsened by the 25bps OPR cut, which resulted in a further compression of 11bps qoq to 1.89%. Marginal operational cost increase of 1.5% yoy, sharply lower allowances (-83% yoy), lower impairments and decent growth in associate Bank of Chengdu (+7.4% yoy) altogether cushioned the impact of the weaker operating profit.

Earnings Revision of 6-6.3% for FY20E-21E

We revise down FY20E-21E net earnings by 6.0-6.3% as we make adjustments to our fund-based income, non-interest income and NIM (1.9- 2.0%), to better reflect its operating outlook going forward. We currently forecast loan growth of 4.8%-5.0% for FY20-22E

Maintain HOLD. PT Revised to RM18.50 (from RM20.70)

We reiterate our HOLD rating with a revised Price Target of RM18.50 (1.35x CY20E P/BV, CY20E ROE of 9.9%). For FY20, we remain cautious on business and consumer sentiment in the country, noting that domestic business activities are being affected by slower global growth. Meanwhile, HLB continues to leverage on its niche in the retail, business-banking and global markets, which had seen earnings sustained amidst a challenging market. Downside/upside risks: Further/lower NIM pressure.

Source: Affin Hwang Research - 29 Aug 2019