Period  4Q14/FY14

Actual vs. Expectations HLBANK’s FY14 net profit of RM2,102m (+13% YoY) was within our and street estimates, representing 102% and 104% of respective forecasts.

Dividends  A final DPS of 26 sen (vs. 4Q13: 23 sen) was declared, bringing its full year DPS to 41 sen (vs. FY13: 34 sen).

In terms of dividend payout ratio, it increased to 34% from 32%.

Key Results Highlights

FY14 vs. FY13, YoY

 HLBANK’s stellar earnings performance (+13%) can be attributed to: (i) lower opex (-3%) and (ii) higher share of profit contribution from Bank of Chengdu, its 20% associate company (+40%).

 Pressure on net interest margin (NIM) was well contained as it stays flat at 1.7%. Management shared that it will not engage in price-based competition to raise more deposits but may match lending rates of peers to expand its loan base.

 Loans grew at a faster pace (+7%) vs. deposits (+5%), lifting its loan-to-deposit ratio (LDR) to 80% from 79%. Essentially, loan growth was within our expectation but missed management target of 10%, while coming in below industry average of 9% as at end-June 14.

 Loan growth mainly came from mortgage (+14%) and SME (+12%) segments. For deposits, current account & savings account deposits (CASA) rose 7%, making up 26% of its total deposit base.

 Thanks to strict cost controls, HLBANK’s cost-toincome ratio (CIR) fell to 44% from 46%. We noticed that its administrative and general expenses fell 24%.

 On the back of robust credit recovery management, HLBANK’s asset quality remains sturdy. Gross impaired loans felled 22bpts to 1.2%, while gross loan loss provision dipped 32bpts to 1.5%. Consequently, loan loss coverage (LLC) declined by 2ppts but still stayed above the 100% mark. To note, its credit charge ratio was flat at 0.05%.

 Non-interest income contracted 9% as a result of lower gains in trading securities and forex activities. It now only makes up 23% of total income (vs. FY13: 26%).

 Bank of Chengdu contributed 14% to HLBANK’s PBT vs. 11% in FYM13.

 ROE was flat at 15%, in-line with our expectation and management guidance of 15%-17%.

 CET1, Tier 1 and total capital ratios were relatively unchanged from last year at between 10%-15%.

1Q15 vs. 4Q14, QoQ

 Quarterly net profit grew 8% on the same reasons mentioned above.

 NIM fell marginally (-3bps).

 LDR was unchanged at 80% as loans and deposits grew in tandem (+2%-3%)

 CIR jumped 3ppts to 46% as seasonality kicks in where marketing activities surged middle of the year.

 Asset quality indicators were positive. Loan loss coverage stood at 129% while gross impaired loans and gross loans loss provision contracted 6-9bps.

 Non-interest income spiked up 40% on the back of higher fee, investment and trading income.

Outlook    Management hopes to grow its loan book by 10% next year vs. 7% in FY14. We think this is challenging given moderation in consumption trend. This is observed from recent 2Q14 GDP numbers where the private consumption expenditure sub-component slowed down to 6.5% from 7.1% in 1Q14 and 6.8% in 2Q13 (YoY). Furthermore, system loan growth has also tapered to 9%-10% from 12%-13% level 3-4 years back. All in all, we keep our 7% loan growth assumption for the next two years as we think it could maintain its current growth trajectory.

 Asset quality may be hampered by: (i) rising inflation arising from Government subsidy rationalisation efforts and implementation of GST next year, coupled with (ii) higher cost of funds from another potential 25bps hike in OPR (to 3.5%) during the next Monetary Policy Committee (MPC) meeting on 18 Sept. HLBANK maintained its guidance on credit charge ratio at 25-30bpts. However, due to continuous improvement in gross impaired loans ratio, we believe its credit charge could possibly stay at less than 10bps going forward.

 Management shared that it will not submit to price competition to raise more deposits but may match lending rates of peers to expand its loans book. FY14 LDR stood at 80% suggesting a lot more room to leverage on existing deposits for loans growth. HLBANK expects NIM to contract 0-8bps and LDR to be around 80%-82%, while we are forecasting NIM to contract 7bps with a LDR assumption of 81%-83% for the next two years.

 Non-interest income as a percentage of total income is targeted at 25% as management expects to perform better than FY14 of 23%. However, given that this segment is highly subjected to the volatility of debt and equity capital market, we have opted to be conservative and assume 24% contribution.

 CIR is expected to trend lower to 42%-44% from FY14 of 44% on the back of stringent cost controls, which will be further enforced next year. Our expectation is in-line with management guidance at 44%.

 ROE is targeted to be at least 14% and we think this is achievable.

Change to Forecasts      Some housekeeping adjustments were made, post-updating the full set of financial results into our model. However, our FY15E PAT was left relatively untouched at RM2,252m vs. RM2,253m previously. Furthermore, we introduce our FY16E forecasts where we expect its earnings to grow by another 7% to RM2,399m.

 However, for dividends, we nudge up the payout ratio to 35% from 33% to reflect HLBANK’s generosity in its recent disbursement. We forecast the bank to declare DPS of 41-44 sen instead of 39 sen as previously estimated.

Rating Maintain MARKET PERFORM

Valuation  Our TP is unchanged at RM15.20 based on 1.8x FY15 P/B.

 Although current valuation seems undemanding, the stock could potentially de-rate as future growth rates taper, based on our forecasts.

Risks to Our Call     Further margin squeeze from tighter lending rules and stronger-than-expected competition domestically.

 Weaker contribution from its Chinese associate.

 Slower-than-expected loan growth and deterioration in asset quality.

 Rising credit charge as result of an up-cycle in non-performing loan (NPL).           

Source: Kenanga