• Hong Leong Bank’s (HLB) 2QFY21 net profit came in at RM670.8m (-4.4% yoy; -8% qoq), while 1HFY21 results were flat yoy. The results were within our and consensus estimates. ECL allowances rose substantially in 2QFY21 due to management’s conservative approach
• Otherwise, HLB’s 1HFY21 pre-provision profit remained robust (+22.3% yoy), driven by fund-based income growth (+15.7% yoy; NIM up 5bps yoy to 2.05%), and marginally lower overheads.
• We maintain our FY21E-23E earnings forecasts. Upgrade to BUY on valuation with an unchanged 12-month PT of RM20.30 (based on 1.47x CY21E P/BV target). DPS of 14.8 sen was proposed in 2QFY21

1HFY21 Operating Income Grew a Robust 12% Yoy

HLB reported a robust set of operating results in 1HFY21, with net operating income up 12% yoy while pre-provision profit was up 22.3% yoy. 1HFY21 fund-based income reported a 15.7% yoy growth despite the rate cuts, as HLB benefited from the repricing down of deposit rates, a decrease in fixed deposits (-4.8% yoy) and robust CASA growth of 21.5% yoy (CASA ratio at 30%). As a result, NIM expanded by 5bps yoy to 2.05% in 1HFY21. Non-interest income grew 3% yoy, driven by Treasury gains, wealth management and credit card fees. Meanwhile, Bank of Chengdu’s contribution (19.4% of 1HFY21 pre-tax profit) was up 8% yoy.

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

HLB’s management has raised its FY21 NCC target to 30bps (already pencilled into our forecasts) from its previous guidance of 15-20bps, implying a lower 2HFY20 NCC of 14bps (annualized). As a result, 2QFY21’s ECL allowances rose substantially by 46bps qoq to an annualized NCC of 64.6bps (1HFY21 NCC stood at an annualized 46bps). Similar to what other banking peers have communicated, the pace of new applications for financial relief and assistance have moderated in Jan-Feb 21 compared to 4Q20. For HLB, the outstanding loans under the payment relief assistance plans have declined from 8% (as at 16 Nov20) to 7% (as at 31 Jan21).

Upgrade to BUY, Price Target Unchanged at 20.30

We upgrade our rating from HOLD to BUY (largely on valuation grounds), though our 12- month PT is unchanged at RM20.30 (based on a 1.47x P/BV on the CY21E BVPS) underpinned by a CY21E ROE at 9.74% and cost of equity of 7.6%. Our earnings forecasts for FY21E/22E/23E remain unchanged, while underlying assumptions include: loan growth of 4% yoy, CIR of 39-40%, NIM of 2.02-2.07%. Downside risks: interest rate cuts; higher NPL rates from the targeted assistance program.

Source: Affin Hwang Research - 1 Mar 2021