HLB’s 9MFY20 core net profit of RM1,925m (-0.7% yoy) was within Affin’s and consensus estimates. Similar to other banks’ moves, HLB had raised its provisioning in 3QFY20, as implied by an annualized net-credit-charge (NCC) of 35.5bps, while 9MFY20 averaged at 13bps. HLB’s core operating results remain decent – i) 9MFY20 fund-based income grew 2.3% yoy though 3QFY20 NIM was impacted by the 50bps OPR cut; ii) loan growth at 3.5% ytd (driven by mortgages); iii) a significant realized treasury gain in 3Q20; iv) robust contribution from Bank of Chengdu (BOCD), up 12.7% yoy for 9MFY20. Reiterate SELL, PT revised to RM10.25 (based on CY21 valuation).

Operating Income Holding Up in 3QFY20; Within Expectations

HLB’s underlying performance continued to be supported by steady 9MFY20 fund-based income (+2.3% yoy; driven by loan growth of 3.5% ytd; +6.6% yoy, +0.8% qoq) as well as steady non-interest income growth of 6.2% yoy (excluding disposal gains of RM90m in 9MFY19), which was driven by realized treasury gains. Meanwhile, contribution from BOCD (+12.7% yoy) remains robust at 20% of HLB’s 9MFY20 pre-tax profit.

Minimal NIM Pressure Expected for FY20 Due to Easing COF Impact

Based on management’s guidance, FY20’s NIM may potentially average about 1.94%, i.e. a minimal slippage of 2bps vs. FY19’s NIM of 1.96% despite a 100bps OPR cut from Jan-May20. This is due to the easing cost-of-funds as a results of shortened FD duration (from maturity of corporate FDs).

GIL Ratio May Normalize in 4QFY20; Prudent Provisioning May Continue

HLB saw its GIL ratio rising to 0.98% qoq from 0.84%, largely due to some delinquencies in the consumer portfolio when news of the 6-month moratorium was announced. HLB had since addressed this issue with customers and its GIL ratio is expected to normalize to ~0.8% in 4QFY20. Nonetheless, management may continue to exercise caution, and we expect HLB’s NCC in FY20-22E to average at 12-14bps in light of the uncertainties.

Maintain SELL. PT Revised to RM10.25 (from RM10.00)

Reiterate SELL with a revised Price Target of RM10.25 (0.73x CY21E P/BV, CY21E ROE of 7.3%) as we roll-forward our valuation horizon to 2021. We remain cautious on the back of a more muted economic outlook while a rising unemployment rate continues to pose risk to asset quality. Our 2020E-22E assumptions: loan growth at -2% to +2%, NIM at 1.9-1.96%. Upside risks: economic recovery, decline in credit cost.

Source: Affin Hwang Research - 1 Jun 2020