• Hong Leong Bank (HLB) reported a 4QFY20 net profit of RM569.4m (-10.5% yoy; +6.5% qoq), while FY20 net profit of RM2.49bn (-6.4% yoy), was within our and consensus estimates, despite taking into account a ‘mod loss’ impact of RM142m and stepping up provisions.
• Though the quarters ahead remain uncertain, HLB will continue its proactive provisions albeit to a lesser degree, we believe that NCC could range between 20-25bps for FY21 vs. 23bps in FY20.
•  We made some minor housekeeping revisions to our earnings forecasts. Maintain Hold with a revised PT of RM15.30. A final DPS of 20 sen proposed (vs. 34 sen in 4Q19).

FY20 operating results (+1.1% yoy) was intact, even with ‘mod-loss’ impact

On a ‘BAU” basis, HLB’s FY20 operating income grew 11.2% yoy, with fund-based income up 4.6% yoy (excluding a net ‘modification-loss’ of RM142m) while non-interest income was up 10.3% yoy (driven by Treasury gains and wealth management fees in 4QFY20). Other key takeaways: i) 4QFY20 NIM slipped 22bps qoq and 27bps yoy to 1.62%, while FY20 was down 8bps yoy to 1.88%. Ex-mod loss, FY20 NIM would have been 1.96% (flat yoy); ii) loans were up 6.1% yoy (outperforming most peers); iii) 4QFY20 annualized net credit cost (NCC) spiked up to 53bps vs. 14bps in 4QFY19 and 35.5bps in 3QFY20, while FY20 NCC rose to 23bps (with 6bps attributable to macro provisions and 15.5bps in additional expected credit loss buffer) vs. 1bp in FY19.

What to Expect Ahead? Downside Risks to Earnings Remain Down the Road

We continue to anticipate proactive provisions, as delinquencies may rise for borrowers in the vulnerable sectors, after the loan moratorium period ends by Sept20. We expect HLB’s FY21E NCC to stay at 23bps in FY21E (which is also buffered by an ‘impaired loan cover + regulatory reserves’ ratio of 236%). Meanwhile, any further rate cuts may see HLB’s NIM impacted negatively by around 1-2bps for every 25bps rate cut (net profit impact at ~RM32m or 1.1% of FY21E).

Maintain HOLD, Price Target Raised to RM15.30 (from RM15.00)

We maintain our HOLD rating on HLB, though we raise our PT from RM15.00 to RM15.30 (based on a 1.03x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 9.2% and cost of equity of 9.0%. We made some housekeeping adjustments of +1.9% and +1.6% to our FY21E-22E earnings, while introducing FY23E EPS (+ 5.5% yoy). FY21E-23E underlying assumptions: loan growth 4% yoy (from 3% previously), NIM at 1.95%-2.0% net credit cost at 18-23bps, CIR 43-44%. Upside/downside risks: interest rate cuts/hikes

Source: Affin Hwang Research - 1 Sept 2020