• Hong Leong Bank (HLB) reported a 1QFY20 net profit of RM729m (+5.9% yoy; +28% qoq), coming in marginally above our and consensus estimates. Key drivers include robust fund-based income growth (with recovery in NIM), better non-interest income and expansion in Bank of Chengdu’s contribution.
• Expected credit loss (ECL) allowance remains elevated (up >100% yoy) though declined 45.4% qoq as management continued to build-up pre-emptive buffers. 1QFY21 NCC stood at 28.4bps vs. a credit recovery in 1QFY20.
• We made 5.8-8.0% earnings revision to our FY21E-23E forecasts. Maintain Hold with a revised PT of RM16.60 (from RM15.30).

1QFY21 operating results came in at a robust growth of 11% yoy, +12.7% qoq

HLB’s 1QFY21 operating income came in at RM1,349m (up 5.9% yoy; +28% qoq), with fund-based income recovered 12.5% yoy (given repricing down of deposit rates and decline in pricey deposits) while qoq rose 28% in the absence of the Day-1 net ‘mod-loss’. Non-interest income also grew 7.1% yoy (driven by Treasury gains, wealth management and credit card fees). Other key takeaways: i) 1QFY21 NIM recovered 38bps qoq to 2.0% while being on par with 1QFY20’s NIM; ii) loans were up 6.8% yoy (outperforming most peers) and grew 1.5% qoq (driven by its pipeline of property financing); iii) robust contribution from Bank of Chengdu (accounting for 18.6% of pre-tax profit; up 17% yoy).

Building up more provision buffers, in the event of a spike in default cases

We believe that additional buffers are required should there be a spike in default among the lower income (B40) and certain business/SME customers. We are raising our NCC assumptions further from 23bps/18bps/20bps to 30bps/25bps/22bps for FY21E/22E/23E. Based on guidance, about RM11.8bn or 8% of HLB’s loanbook is under relief/assistance/R&R programs, HLB’s ECL allowances of RM1.3bn (comprising Stage 1 at RM790m and Stage 2 at RM320m; collectively accounts for 83% of outstanding ECL) and regulatory reserves of RM1.3bn appear more than sufficient to buffer against a 1% impairment of its loanbook value, but we think it is prudent for management to raise its LLC further (from current level of 236%).

Maintain HOLD, Price Target raised to RM16.60 (from RM15.30)

We maintain our HOLD rating on HLB, though we raise our PT from RM15.30 to RM16.60 (based on a 1.2x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 9.74% and cost of equity of 8.6%. Our earnings forecasts for FY21E/22E/23E have been revised by 5.8-8.0% as we also raised our fund-based income growth based on higher NIM of 2.0- 2.02% (from 1.98%-2.0%) while adjusting for improved non-interest income. FY21E-23E underlying assumptions: loan growth 4% yoy, CIR 39-40%. Upside/downside risks: interest rate cuts/hikes.

Source: Affin Hwang Research - 30 Nov 2020