HLBANK’s 12M16 core earnings of RM1,903m (-15.0% YoY) exceeded our, but was within consensus, expectations, accounting for 106%/96% of respective fullyear estimates. The exceeded expectation was due to lower-than-expected credit costs. A final dividend of 26.0 DPS was declared bringing total dividend to 41.0 sen/share (as expected). Going forward, loans growth and asset quality is expected to be challenging, thus a slight revision upwards in our forecast earnings. TP is revised to RM13.56 (from RM13.45 previously) but MARKET PERFORM call is maintained
12M16 core earnings fell due to higher opex, loan loss provisions and fall in contribution from its China operations by 22.2%. Loans grew slower at +6.3% and Net Interest Margin (NIM) also further compressed by 11bps. However, there were improvements on a QoQ basis with net income improving (after falling in the preceding quarter) due to higher top line growth and write-backs. Loans growth was slow at +1.5% but NIM compression was minimal at 1bps. Asset quality continues to improve by 3bps.
Outlook is still challenging. As outlook is still challenging both internally and externally, management believes that domestic demand will still be the main driver. China operations are expected to recover in the 2H17. Going forward management gave its FY17 guidance; (i) loans growth of 5-6%, (ii) NIMs improving 5-10bps, (iii) CIR below 4%; (iv) credit charge of 25-35bps (as management expects recoveries to be challenging) and (v) ROE of 10-11%.
We also revised our assumptions for FY17E and introduced our FY18E numbers. Our assumptions for FY17/FY18 are; (i) loans growth of +6% (previously at +8.0%) for FY17, 6.3% for FY18; (ii) deposits growth of +6.5% (previously at 7%) for FY17 and 6.3% for FY18; (iii) improved NIM at 5bps (previously flattish) for FY17 and stabilizing for FY18, (iv) CIR of 45% for FY17 (previously at 46%) and at 45% for FY18, (v) credit charge of 0.20% for FY17 (unchanged) and flattish for FY18 with (vi) ROE of 9.7% (vs ROE of 10.1%) for FY17, and 9.7% for /FY18.
Change to earnings Forecast. We tweaked our FY17E earnings upwards by 0.4% to RM2,106m and introduced our FY18E earnings of RM2,246m.
Target Price revised with call maintained. We revised our TP upwards to RM13.56 (RM13.45 previously). This is based on a 1.12 P/B (previously 1.37x FY17 P/B) where we utilised; (i) COE of 8.72% (from 8.0% previously), (ii) FY17 ROE of 9.7% (previously FY17 ROE of 10.1%), and (iii) terminal growth rate of 2.5% (unchanged). The lower P/B is to reflect lower ROE generation going forward. Our MARKET PERFORM is maintained as we believe the stable economy going forward will improve asset quality.
Risks to our call are: (i) lower than expected margin squeeze, (ii) higher-than-expected loans & deposits growth (iii) worse-thanexpected deterioration in asset quality and (iv) higher-than-expected rise in credit charge.
Source: Kenanga Research - 30 Aug 2016
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