Period  1Q15

Actual vs. Expectations HLBANK’s 1Q15 net profit of RM548m (+1% YoY) was in line with our and street estimates, making up 24% and 25% of respective full-year forecasts.

Dividends  As expected, no dividends were declared. Payout is usually in 2Q and 4Q.

Key Results Highlights1Q15 vs. 1Q14, YoY

 Net profit (+1%) was flat mainly because of lower non-interest income (-29%) as: (i) credit card related fee declined (-26%) coupled with (ii) softer gains from treasury operations.

 Pressure on net interest margin (NIM) was well arrested at 2%, thanks to prudent liquidity management and the OPR hike of 25bpts in July.

 Loans growth was quicker (+6%) compared to the increase in deposits (+4%). In turn, this lifted loan-todeposit ratio (LDR) by 2ppts to 80%. So far, loans growth is below our and management target of 7% and 10%, respectively.

 The slower-than-expected loans growth is primarily due to: (i) tepid auto-financing (+0%) and (ii) weak working capital lending (-2%).

 For deposits, current account & savings account deposits (CASA) rose 4%, making up 26% of its total deposit base.

 The extension in useful life for its fixed assets along with stricter cost controls helped to improve cost-toincome ratio (CIR) to 42% from 44%.

 Asset quality remained robust where gross impaired loans and gross loan loss provision fell 21bpts and 30bpts, respectively. In turn, loan loss coverage (LLC) declined by 2ppts but is still above the 100% mark. Notably, credit charge ratio was at -6bpts due to recovery from bad loans.

 Share of profit from Bank of Chengdu, its 20% associate company, grew 7% thanks to stronger loans growth and stable NIM. It now contributes 14% to HLBANK’s PBT vs. 13% in 1Q14.

 Despite annualised ROE dropping 1ppts to 15%, it is in line with our and management expectations.

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

1Q15 vs. 4Q14, QoQ

 Quarterly earnings grew only a mere 2%, no thanks to lower non-interest income (-16%) as explained above.

 NIM improved 4bpts to 2% on the back of the 25bpts OPR hike in July.

 LDR was unchanged at 80% as loans and deposits growth was flat.

 CIR fell 4ppts to 42% as marketing activities typically slow down in July-Sept. Also, the extension in useful life for its fixed assets helped bring down opex.

 Asset quality indicators were intact. LLC stood at 129% while gross impaired loans and gross loan loss provision contracted 3bpts-5bpts.

 Share of profit from Bank of Chengdu increased at a slower rate of 3%, considering the high base effect from last quarter.            

Outlook  In Malaysia, loans growth is expected to taper on the back of moderating consumption trend given rising inflationary environment due to subsidy rationalisation efforts by the Government and impending GST implementation next year. In turn, higher cost of living coupled with the rise in cost of borrowing (as a result of the 25bpts hike in OPR on 10 July) is likely to exert pressure on asset quality. Furthermore, the relatively high industry LDR of over 80% will continue to drive stiff price-based competition in market and hence, NIM pressure is expected to persist.

 In China, the Central Bank had cut the one-year benchmark lending/deposit rates by 40bpts/25bpts to spur the slowing Chinese economy. Essentially, this is a surprise move given that the country is already debt-laden (total debt makes up 250% of GDP). As a result of the asymmetrical rate cut, we expect Chinese banks to experience narrowing NIM but asset quality should improve on the back of easing debt pressure. All in, Bank of Chengdu should see slower growth – this is considering the high base effect given its stellar performance from last year as well.

 No changes were made to its FY15 KPI targets/expectations:

(i) NIM to contract 0bpts-8bpts (1Q15: +1bpts, Kenanga: -7bpts),

(ii) Non-interest income as a percentage of total income is targeted at 25% (1Q15: 19%, Kenanga: 24%),

(iii) CIR to trend lower to 42%-44% (1Q15: 42%, Kenanga: 44%),

(iv) Credit charge ratio at 25bpts-30bpts (1Q15: -6bpts, Kenanga: <10bpts),

(v) Total loans growth of 10% (1Q15: +6%, Kenanga: +7%),

(vi) LDR to be around 80%-82% (1Q15: 80%, Kenanga: 81%), and

(vii) ROE of at least 14% (1Q15: 15%, Kenanga: 15%).

Change to Forecasts    Since HLBANK’s 1Q15 results were in line with expectations, we make no changes to our FY15/FY16 earnings estimates of RM2,252m/RM2,399m.

Rating Maintain MARKET PERFORM

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

 Although current valuation seems undemanding as it trades at -1SD-level, the stock could potentially de-rate as future growth rate tapers, which in turn see lower ROE generation moving forward.

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