We maintain our MP call and TP of RM13.56 as the business environment for Hong Leong Bank is still challenging in both China and Malaysia. Despite 3M17 results coming within our and consensus estimates, there is no clear catalyst going forward with management maintained its FY17 guidance. We also maintain our assumptions.

1Q17 core net profit of RM543m (8% YoY) was within expectations, accounting for 25% of both our and consensus estimates. The positive YoY growth was due to healthy top line growth across the board coupled with improved contribution from its overseas associate. Contribution from its overseas associate improved to 13% of PBT. Loans growth was slower at 4% YoY but despite slower loans, NIM improved by 4bps due to efficient funding management and loan loss provisions falling by 4% (or 1bps). Asset quality deteriorated slightly due to deterioration from non-major segments. On a quarterly basis bottom line declined by 3% as top line was slower at 2% with credit costs recorded at 8bps for the quarter. A lower tax rate mitigated the earnings decline. Compared to the previous quarter, both loans and deposit growth were slower. As expected no dividend was declared in this quarter.

3M17 vs 3M16, YoY

• 
  Top line growth improved by 7.1% (3M16: +0.9%) due to improvements from across the board with: (i) Net Interest Income at +4.6% (3M16: -7.7%), (ii) Islamic banking at +13.2% (3M16: +4.1%) and (iii) Non Interests Income (NOII) at +11.0% (3M16: +31.5%). Islamic banking improved with a 12.8% growth in financing. Improvement in NOII was mainly due to higher investment income at 39% (mainly dividend income from AFS investments). NOII contribution to top line rose by 120bps to 26.9%.
• Contribution from its associate Bank of Chengdu improved by 11% and contributing 13.2% of PBT (3M17: 15.7% and 12.9% of PBT). The improvement is due to lower loan provision and efficient costs management.
• By our estimation, NIMs improved by 4bps to 1.8% due to efficient funding cost management. Fall in cost of funds outpaced fall in average lending yields by 1bps.
• Cost-to-Income Ratio (CIR) was down by 40bps to 44.8% (in line with our expectations of 44.8%) as income growth (+7.1%) outpaced opex (+6.0%). Industry average CIR was at 48.8%.
• Loans grew at a slower pace of +4.0% (3M16: +11.5%) vs. our expectations of 6% (industry’s at +4.2%) while deposit growth was also at a similar rate of +4.0% (3M16: +10.5%) vs. our expectation of +6% (industry’s +0.8%). As a result, Loan-toDeposit Ratio (LDR) was flat at 81.0% (vs. industry’s LDR of 88.6%).
• Loans were driven by housing (+10.3%), and SME (+8.2%). Deposits were driven by FDs at +5.4% with CASA growing at +2.7%. Nevertheless, CASA ratio fell by 30bps to 24.6%

Source: Kenanga Research - 23 Nov 2016