Post-meeting with HLBANK?s management recently, we reiterate our OUTPERFORM rating with a revised TP of RM15.13. We believe it is on track to achieve its FY17 targets, with lower impact of MFR9 for FY18. On the plus side, its low foreign shareholding (at 9.42% as of Mar 17) might see renewed interests given its undemanding valuation, stable asset quality, and healthy NIMs.

On track for FY17. With cyclical headwinds looking subdued, we believe that HLBANK is on track to achieve its FY17 targets. The bank?s focus on appropriate loan pricing coupled with prudent cost management and strategic cost management will continue to support growth in 2017. To recap, its FY17 targets are: (i) Loans growth of 4- 5%, (ii) NIMs to widen by 5 to 10bps), (iii) Cost to Income ratio (CIR) to trend downwards <46%, (iv) Credit charge ratio of 20bps-35bps, and (v) ROE of between 10-11%. Widening NIMs to prevail for FY17. The widening NIMs in 2Q17 is encouraging, with NIMs expanding by 6bps YoY driven by prudent loan pricing and effective funding cost management. We expect improving NIMs for FY17 driven by: (i) CASA ratio maintained (>25% in 2Q17), (ii) cheaper treasury and wholesale funding coupled with lower FD rates thus lower funding costs with maturity of some deposits (82% of FDs matured in Dec 16) and capital instruments, and (iii) strict loan pricing management (recall before the OPR cut, HLBANK raised the rates for certain products like mortgages and auto loans, so essential that sort of helped mitigate the 25 bps impact from OPR cut). Loan pricing have been generally stable since 2HCY16 cut which support the widening NIMs for FY17. Elevated credit costs expected only in FY19. Although MFRS9 is expected to come into effect by 1 Jan 2018, we understand from management that full impact to its bottom-line will be significantly felt only in its FY19 P&L statements due to its June financial year-end. From our understanding, loan loss provisions are likely to be higher by 20-30% (based on the amount of provisions made in April 2016). This is only a preliminary assessment from Bank Negara Malaysia (BNM) with the full impact yet to be ascertained. Based on our estimations, this will entail an additional provisioning of between RM250-370m which will be adequately covered by its Regulatory Reserves (assuming that BNM allows the Reserves to be used to offset against the higher provisioning), which as end of Dec 2016 amounts to RM653m. The use of the Regulatory Reserves will impact HLBANK shareholders? funds, lowering equity resulting in a decline in its CET1 ratio by 20-30bps by our estimates.

Forecasts & risks. No changes to our estimates for FY17 but we fine- tuned our estimates for FY18 on the account of minimal impact of MFRS9. Our net profit estimate for FY18 are revised slightly upwards by 2.1% to RM2346m as we revised down our credit charge ratio assumption by 4bps to 15bps. With the slight increase in FY18 estimate, our FY18 ROE is upped by 19bps to 10.03%.

Valuation & recommendation. With FY18E earnings revised, we raised our TP to RM15.13 (from RM14.79 previously). This is based on 1.28x FY18E P/B (1.25x P/B previously), derived from the Gordon Growth Model with COE of 8.41% (previously 8.37%), FY18 ROE of 10.03% (from 9.84%) and LT growth of 2.5% (unchanged). Notably, our valuation implies -0.5SD below its 5-year average Fwd. P/B which we feel is justified given that asset quality risks are looking benign coupled with widening NIMs. The low foreign shareholding structure (Dec-16: 9.42% vs. 8.1% in Dec-15 and < 20% of its peers), might see renewed interests given its undemanding valuation, stable asset quality, minimal impact of MFR9 for FY18 and healthy NIMs. Maintain OUTPERFORM.

Source: Kenanga Research - 25 Apr 2017