9M16 core earnings of RM1,345m were within our expectation but below consensus, accounting for 72%/67% of our/consensus estimates. No dividends declared as expected. We tweak our earnings estimates for the Group slightly and TP raised to RM13.45 and upgrade our call to MARKET PERFORM. HLBANK 9M16 core net profit (CNP) was within expectations, but CNP declined by 17% underpinned by allowances for impairment losses, lower contribution from China and the one-off Mutual Separation Scheme (MSS) incurred in 2Q15. Stripping of the MSS, CNP would have been lower by 9% YoY.

9M16 vs 9M15, YoY

HLBANK’s CNP was down by 17% underpinned by: (i) a one-off MSS expense, (ii) allowances for impairment of RM104.0m (vs. write-backs of RM75.5m in 9M15), and (iii) lower contribution from its associates in China (-19.6%) to RM233.1m. The China operations contributed 12.7% at the pretax level (excluding MSS) vs. 14.0% contribution in 9M15.

Total income improved by +2.4% (9M15: -0.2%) due to improvements from Islamic banking and Non-Interest Income (NOII) at +10.0% and +21.3% respectively (9M15: -4.6% and - 12.6% respectively).

On an annualised basis, NIMs fell by 15bps to 1.73 as cost of funds rose 8bps vs average lending yield increase of 4bps.

Cost-to-Income Ratio (CIR) went up by 7ppts to 51.4% due to the one-off MSS expense. Excluding the MSS, CIR would have come to 45.9% (within our expectations of 47.2%). Industry CIR was at 50.6%

Loans grew at a faster pace of 7.4% vs our expectations of 8% (industry’s at +6.4%) while deposit growth was almost similar at +7.0% vs our expectations of +7% (industry’s -0.9%). Hence, Loan-to-Deposit Ratio (LDR) improved slightly by 30bps to 81.3%. (vs. industry’s LDR of 86.9%).

Asset quality improved as Gross Impaired Loans Ratio fell by 7bps to 0.82% (vs industry’s 1.6%) while Loan Loss Coverage (LLC) fell by 40bps to 127.3% (vs. the industry LLC of 94.3%). Despite better asset quality, the credit charge ratio still registered at 12bps vs. the 9M15 credit recovery of 9bps.

Capital level remained healthy with CET1 and Total Capital Ratios at 13.3%, and 15.7% respectively, (vs. 9M15 of 9.9%, and 13.6% respectively) well above the regulatory level of 8.5% (CET1) and 10.5% (Total Capital).

Annualised ROE fell by 6ppts to 9.5% as net profit dipped (cum- Rights). Excluding MSS expense, ROE would have been 10.7%.

3Q16 vs. 2Q16, QoQ

Net profit improved at 44.7% (2Q16: -31.6%) due to higher operating profit by +43.6% (absence of MSS), lower loan provisions (-19.9%) and higher contributions from associates and JVs which improved by 36.7%. _ Total income fell 6.6% attributed to fall across the board of NII (- 3.5%), Islamic banking income (-3.0%) and NII (-15.9).

NIMs fell by 5bps to 1.72% while the credit charge ratio fell by 14bps to 0.07%. CIR fell by 14ppts to 47.1%.

Loans growth was slower than deposits growth at +0.7% vs. +1.0% while asset quality improved with GIL down by 4bps to 0.82%.

Outlook. We revised some of our assumptions due to the results; (1) credit charge ratio to 20bps/21bps (from 30bps/29bps), (ii) NIM compression of 4bps to 1.8% for FY16 and stabilizing for FY17 (previously we had factored in NIMs at 1.91%/1.90% for FY16/17. The rest we maintained such as; (iii) loan growth at 8% for both years, (iv) deposits growth for both years at 7%, and (v) CIR at 49%/44% stabilizing for FY17.

Change to earnings forecast. Due to the revised assumptions, we tweaked our FY16E/FY17E earnings by -3.1%/-4.1% to RM1,795m/RM2,012m respectively. Persistent economic uncertainties domestically and in China may hamper share price performance. Furthermore, asset quality may deteriorate further due to the economic uncertainties.

TP raised and upgrade to Market Perform. We revised upwards our GGM-TP to RM13.45 (from RM11.39 previously) based on 1.37x FY17 P/B (previously 1.15x FY17 P/B). We employed: (i) COE at 8.0% from (9.7%), (ii) FY17E ROE of 10.1% (previously FY17 ROE of 10.4%), and (iii) terminal growth rate of 2.5% (from 4.5%) to reflect economic challenges both in China and Malaysia. Risks to our call are: (i) lower than expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-than-expected deterioration in asset quality and (iv) Weaker contribution from its Chinese associate due to persistent economic slowdown. 

Source: Kenanga Research - 25 May 2016