Period

4Q15/FY15

Actual vs. Expectations

Hong Leong Bank (HLBANK)’s FY15 net profit of RM2,233m (+6.2 YoY) was within our and street estimates, representing 102% and 104% of respective full-year forecasts, driven by stellar loans growth of 8.9% YoY and improved asset quality.

Dividends

A final DPS of 26.0 sen (same as 4Q14) was declared, bringing its full-year DPS to 41.0 sen (same as FY14). In terms of dividend payout ratio, it dropped by 2 ppts to 32%.

Key Results Highlights

FY15 vs. FY14, YoY

HLBANK’s stellar earnings performance (+6.2%) can be attributed to: (i) higher loans growth of 8.9% YoY vs our estimates of 6.0% YoY, and (ii) net credit recovery ratio of 5bps (vs. our net credit charge ratio estimates of 13bps).

Pressure on net interest margin (NIM) was well contained as it dropped by 7 bps to 2.01% (vs our estimates of a drop by 17 bps).

Loans grew at a faster pace (+8.9%) vs. deposits (+7.7%), lifting its loan-to-deposit ratio (LDR) to 81% from 80% previously. Our total deposit growth estimation was at 4.32%

Essentially, loans growth is in line with the industry. Loans growth mainly came from mortgage at +15.9% (FY14: +14.0%) and SME at +9.1% (FY14: +12%) segments. For deposits, current account & savings account (CASA) deposits rose 5.3% (FY14: +7.0%), making up 26% of its total deposit base, which is fairly similar to FY14.

Thanks to strict cost controls, HLBANK’s cost-toincome ratio (CIR) inched 2bps higher to 44.6% with opex up by a marginal 1.2% (FY14: -3.0%) (from 46%). vs. our assumptions of 44.2% We noticed that its administrative & general expenses and personnel costs grew by 9.1% and 6.7% (FY14: -23.6% and -0.6% respectively.

On the back of robust credit recovery management, HLBANK’s asset quality remains sturdy. Gross impaired loans fell 34bpts to 0.84%, while gross loan loss provision dipped 38bpts to 1.14%. Furthermore, loan loss coverage (LLC) improved by 7ppts to 136%, well above the industry average of 98%. Against the general expectation, the Group registered a net credit recovery ratio of 5bpts (against previous year’s credit charge ratio of 5bpts and our credit charge ratio estimate of 13bpts).

Non-interest income contracted 4.4% as a result of forex losses and subdued treasury activities. It now only makes up 22% of total income (vs. 12M14: 23%).

Bank of Chengdu now contributes 14.6% to HLBANK’s PBT vs. 14.1% in 12M14.

ROE was at 14.3%, being in-line with our expectation of 14.4% and management’s guidance of 14.0%.

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

4Q15 vs 3Q15

Quarterly net profit grew 18% due to lower tax rate of +9% (vs. 3Q15:+22%).

NIM was almost flat (with a mild contraction of 4bps).

LDR was unchanged at 81% as loans and deposits grew in tandem (+2.6%/2.7%)

CIR remained at 45% for both Quarters

Asset quality indicators were positive. Loan loss coverage was up by almost 7ppts to 136.3%% while gross impaired loans contracted 5bpts and gross loans loss provision remains flat at 1.14%.

Outlook

Management hopes to grow its loans book by 9% as in FY16 (be very careful on this). Our forecast is a tad lower at 8% loans growth for the next two years.

Asset quality may be hampered by: (i) rising inflation from the weaker Ringgit, and (ii) slower economic activities. HLBANK maintained its guidance on credit charge ratio at 25-35bpts. We assumed around 30bpts for both FY16 and FY17.

Management guided for NIM to compress between 5-10bpts. We have taken a conservative stand at 10bpts for both FY16E and FY17E.

For CIR, management has guided for a ratio of between 42%-44%. We are following this guidance and opted for CIR at 42% for FY16E and 41% for FY17E.

Our ROE is targeted to be at least 11.7% for FY16E and 11.2% for the following year. This is after taking into consideration the dilution impact from the coming capital raising exercise by the end of CY15. Without the capital raising exercise, ROE is expected to be at 11.8% and 11.4% for FY16 and FY17 respectively. Management guided for a ROE of more than 12% (after the capital raising exercise).

Change to Forecasts

Some housekeeping adjustments were made, post-updating the full set of financial results into our model. Our FY16 E PAT has been revised downwards to RM2,058m vs. RM2,288m (-10%) previously. Furthermore, we also taking this opportunity to introduce our FY17E numbers where we expect earnings to grow by another 5.2% to RM2,164.7m.

However, for dividends, we nudge up the payout ratio to 35% from 32% to reflect HLBANK’s generosity in its recent disbursement. We forecast the bank to declare DPS of 41.0 sen for both FY16E and FY17E.

Rating

MARKET PERFORM maintained

Valuation

We revise down our GGM-TP to RM13.91 (from RM14.22 previously) based on post capital raising.

The P/B is based on 1.28x CY16 (previously 1.52x CY15 P/B). We employed: (i) COE of 9.8% (unchanged), (ii) CY16 ROE of 11.5%. (previously CY15 ROE of 13.4%, pre-capital raising), and (iii) terminal growth rate of 4%.

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 loans growth and deterioration in asset quality.

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

Source: Kenanga Research - 27 Aug 2015