HLBANK’s 9M17 performance was within expectations improving by 23% YoY on the back of robust topline. No dividend declared for the quarter as expected. We maintained our TP and call.

Strong NIM. Year-on-year, core net profit (CNP) improved by 23.6% on the back of strong topline revenue as well as lower opex and impairments allowances. At 78%/76% of house/consensus’ full-year estimates, the 9M17 net profit of RM1.7b was within expectations. The strong topline (+9.7% YoY) was supported by a broad-based growth with Net Interest Income (NII) rebounding (from a year ago) to 6.7% YoY, Islamic Banking Income (+17.6%) and fee based income expanding albeit slower (from a year ago) at +13.9% YoY. The rebound in NII was attributed to improved NIM (up by 11bps YoY and within our expectations) as loan growth was tepid at +3.9% YoY. Prudent loan pricing and cheaper funding cost drove the improved NIM. Cost-to-income ratio improved by 8ppts to 43.9% (vs industry’s 46.3%) as topline outpaced opex at -6.3%. Its 20% associate Bank of Chengdu (BOC) improved 3.7% YoY contributing 11.7% (vs our expectations of ~11%) of overall PBT.

Loans growth was slower than the year before at 3.9% (vs management’s guidance of 4-5% and our expectation/industry’s of ~+5%/+6.0% YoY). Following a similar traction, deposits growth was slower (from a year ago) at +4.2% YoY forcing loan-to-deposit ratio to be marginally flattish at 81.1%. On a positive note, CASA ratio was higher by 110bps to 25.5%, outpacing deposits growth at +8.8% YoY, which contributed further to improved NIM. Asset quality is well contained with gross impaired loans (GIL) inching slightly by 6bps to 0.82% (vs industry’s 1.63%) but credit charge was lower by 1bps to 0.11% (vs our expectations of 0.15%).

On track with BoC and prevailing NIMs. HLBANK expects the operations of Bank of Chengdu (BoC) to stay stable and on course to recovery in 2017 on the back of cost discipline, lower loans loss provisions and prudent management. We understand that loan loss provisions have stabilised and unlikely to swing north. Despite marginally below management’s target, we believe its loans growth target is achievable as demand for loans are slowly picking up with higher approved applications. On a positive note, NIM looks healthy and improving translating into better NII which likely to offset any shortfall in target loans. We do not see downside pressure on NIM assured by management’s guidance of stable loan pricing with cost of funds likely to be constant as LDR is relatively within management’s target.

No change in earnings. As results were in line with our estimates, our FY17 forecast earnings are maintained at RM2138m.

No change in TP and call. TP maintained at RM15.15, based on 1.28x FY18E P/B (GGM derived) with COE of 8.4%, FY18 ROE of 10.0% 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 NIM. The low foreign shareholding structure (Mar-17: 9.4% vs. 8.6% in Mar-16 and < 20% of its peers), might see renewed interests given its undemanding valuation, stable asset quality, minimal impact of MFR9 for FY18 and healthy NIM. Maintain OUTPERFORM.

Source: Kenanga Research - 30 May 2017