• Period
  1Q16/3MFY16 Actual vs. Expectations
  Hong Leong Bank (HLBANK)’s FY15 net profit of RM503m (-8.1% YoY) is within our and consensus estimates, representing 25% and 23% of respective fullyear forecasts, underpinned by stellar loans growth of 11.5% and non-interest income growth of 31.5% YoY.

Dividends

• No dividend was declared, as expected. Key Results

Highlights

• 1Q16 vs.1Q15, YoY
  HLBANK’s net profit was down by 8.1% underpinned by higher operating expenses at +7.8% and allowances for impairment of RM24.0m (vs. write-backs of RM14.9m in 1Q15).
  Total income was a tad higher to +0.9% due to stellar performances from non-interest income (NOII) at 31.5%.
  Net interest income fell by 7.7% despite an 11.5% expansion in loans. This was because Net Interest Margin (NIM) compressed by 26bpts to 1.75% as intensified deposits competition raised funding costs.
  Cost-to-Income Ratio (CIR) went up by ~3ppts to 45.2% as operating expenses outpace total income.
  Loans grew at a faster pace of 11.5% while deposit growth was almost similar to loans with growth of +10.6%.Hence, Loan-to-Deposit Ratio (LDR) stayed relatively flat, around 80%-81% (vs. industry’s LDR of 85.4%).
  Asset quality improved as Gross Impaired Loans Ratio by 32bpts to 0.83% while Loan loss coverage (LLC) went up by 2ppts to 131%.
  Despite better asset quality, we still saw the credit charge ratio to register at 9bpts vs the 1Q15 credit recovery of 6bpts.
  Capital level remained healthy with CET1, Tier 1 and Total Capital Ratios at 10.5%, 11.6% and 13.7%, respectively.
  Annualised ROE fell by 3.4ppts to 12.3% as net profit dipped (pre-Rights).
• 1Q16 vs. 4Q15, QoQ
  Net profit declined by 18.2% as contributions from its associates dipped 30.0% and a higher tax rate of 19.5% (vs. 8.6% in 4Q15).
  Total income fell by 1.7% dragged by lower NOII at 10.8%.
  NIMs improved by 1bpts to 1.8% while the credit charge ratio was flattish at 9bpts. No change in CIR at 45% as both total income and opex fell by 2%.
  Loans and deposits growth was almost the same pace at 2.6% and 2.4%, respectively. Change to

Forecasts

• Since results were within expectations, no change to our earnings estimates of RM2,014m/RM2,105m for FY16/FY17.

Rating

• Maintained MARKET PERFORM
  Persistent economic uncertainties domestically and in China may hamper share price performance.

Valuation

• We revised down our GGM-TP to RM11.51 (from RM13.91 previously) post rights issue based on 1.2x CY16 P/B (previously 1.3x CY16 P/B). We employed: (i) COE of 9.7% (previously 9.8), (ii) CY16 ROE of 10.7% (previously CY16 ROE of 11.4%), and (iii) terminal growth rate of 4%. The lower P/B is to reflect the lower ROE going forward post rights issue.

• Key Results

Highlights (Details)

• 1Q16 vs.1Q15, YoY
  HLBANK’s net profit was down by 8.1% underpinned by higher operating expenses of +7.8% to RM463m and allowances for impairment of RM24 (3M15: writeback of RM15m). The lower net profit was also dragged by lower contribution from Bank of Chengdu and JV in China which fell by 15%. Contribution from China fell as lower lending rates and higher impairment allowances dragged profits.
  Total income was a tad higher to +0.9% due to stellar performances from NOII at 31.5%, underpinned by higher forex (due to revaluation) and dividend income from wholesale fund.
  Net interest income fell by 7.7% despite an 11.5% expansion in loans as intensified deposits competition raised funding costs. This led to annualised NIM being compressed by 26bpts to 1.75%.
  CIR went up by 3ppts to 45% as operating expenses outpaced total income. Growth in expenses was underpinned by growth in personnel expenses at +9.7% (3M15: 2.6%) and marketing at +10.0% (3M15: 17.4%).
  Loans grew at faster pace of 11.5% driven by growth in purchase of residential property at +16.2% (3M15: +15.2%) and working capital at +14% (3M15: -1.8%). The purchase of residential property made up the bulk of the loans at 40% (1Q15: 39%) followed by loans for working capital at 20% (1Q15: 20%).
  Deposit growth was similar to loans with growth of +10.6% much of it driven by deposits from business enterprises and government & statutory bodies at +17.1% and +24.8%, respectively (1Q15: +15.1% and -32.2%, respectively). Both of these segments make up the bulk of deposits at 48% and 49%, respectively. CASA grew by 4.8% and but CASA/Deposits ratio fell by 1.37ppts to 25%.
  Liquidity remains healthy with LDR at 81% compared to 80% a year ago. Asset quality improved by 32bpts to 0.83% while LLC went up by 2ppts to 131%. Despite better asset quality, we saw the credit charge ratio registered at 9bpts vs. the 1Q15 credit recovery of 6bpts.
  Capital level remained healthy (after dividend) with CET1, Tier 1 and Total Capital Ratios at 10.5%, 11.6% and 13.7%, respectively, well above regulatory minimum.
  Annualised ROE fell by 3.4ppts to 12.3% as net profit dipped.
• 1Q16 vs. 4Q15, QoQ
  From the preceding quarter, net profit declined by 18.2% as contribution from its associates fell by 30.0% and a higher tax rate of 19.0% vs 8.6% the previous quarter.
  Total income fell by 1.7% dragged by lower NOII at 10.8% but mitigated by better performance from Islamic Banking where income grew 9.3%.
  NIMs improved by 1bpts to 1.75% while credit charge ratio was flattish at 9bpts. No change in CIR at 45% as both total income and opex fell by 2%.
  Loans and deposits growth was similar at 2.6% and 2.4%, respectively. On a quarterly basis, loans were driven by residential purchase at 3.8% (4Q15: 4%) and working capital at 2.5% (4Q15: 5.3%). Outlook (Details)
  As earnings were within expectations we maintain our assumptions for FY16/FY17 where: (i) loan growth at +8% for both FY16/FY17, (ii) deposits growth at +7% for both FY16/17, (iii) CIR at 43%/42% for FY16/FY17, and (iv) credit charge ratio of 30%/29% bpts for FY16/FY17.
  The upcoming rights Issue are expected to dilute our forecasted earnings for FY16/FY17.
  The rights Issue will see its number of outstanding shares bulging to 2,086m from the current 1,765m.
  Our forecast EPS for FY16/FY17 post rights are at 96.5 sen/100.9 sen from 126.4 sen/114.01 sen (A downwards revision of 31%/13%).
  Our forecast ROE post rights are now at 11.1%/10.4% for FY16E/FY17E from 11.8%/11.6% (a downward revision of 7%/12% for FY16/FY17.
  Management has indicated that the MSS will go ahead as planned. Assuming a 10% reduction in workforce and an average payout ratio of 10x wages, we believe it will cost HLBANK an additional RM185.5m for FY16. As nothing has been cast in stone, we have not input any MSS costs yet.

Risks

• 
  Further margin squeeze from tighter lending rules and stronger-than-expected competition domestically.
  
• Weaker contribution from its Chinese associate due to persistent economic slowdown.
  
• 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: Hong Leong Investment Bank Research - 18 Nov 2015