HLBANK’s 12M17 performance is within expectations, improving by 13% YoY on the back of robust top-line. A final DPS of 30.0 sen was declared, bringing a full-year DPS of 45.0 sen (in line). TP raised but MARKET PERFORM call maintained due to demanding valuations.

Broadly supported growth. Year-on-year core net profit (CNP) surged +12.7% on the back of improved top-line (+8.9% YoY) and strong contribution from its associate Bank of Chengdu (BOC). At RM2.14b, the results are within expectations, at 100%/96% of our/market estimates. The improved top-line was broadly supported with fund and fee-based income at +7.5% and +8.6% YoY, respectively, with Islamic Banking income surging ahead at +17.7% YoY. Fund-based income rebounded from the negative territory as NIM surged by 11bps (in line) to 1.9% despite slower loans (by 20bps) from the previous corresponding period. The strong top-line saw Cost-to-Income ratio falling by 5ppts to 44.1% (vs industry’s 49.1%) as top-line outpaced opex (declining by 3.8%).

Loans growth was slower than the year before at 3.8% (vs management’s guidance of 4-5% and our expectation/industry’s of ~+5%/+%5.7 YoY). Following a similar traction, deposits growth was slower (from a year ago) at +4.5% YoY forcing loan-to-deposit ratio to ease by 60bps at 80.6%. No change in CASA ratio at 25% but CASA growth was faster than fixed deposits by 40bps. Uptick in deterioration in asset quality by 17bps to 0.96% (still lower than the system at 1.64%) coming mostly from residential properties surging ahead by 9bps. Credit cost was up by 9bps to 0.13% (vs our expectation of 0.15%) with the surge in impairments allowances coming in the 4Q.

Pickup in 1HCY18. We expect loans to pick up in 2H18 on the back of a supportive economic environment. Management expects loan to be supported by pick-up in auto loans due to lower reduction in auto bookings for FY18. On a positive note, NIM looks healthy and improving, translating into better NII, which is 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 will be relatively maintained within management’s target. We expect a dip in ROE for FY19 due to the impact of MFRS taking place by 1 Jul 2018.

Slight change in earnings. Our FY18 earnings are tweaked slightly by +0.2% for housekeeping purposes and we introduced our FY19E earnings of RM2,407m.

TP revised upwards but other assumptions unchanged. Our TP is raised to RM15.25, based on 1.33x FY18E P/B (GGM derived) with COE of 8.25% (unchanged), FY18 ROE of 10.16% (from 10.03% previously) and LT growth of 2.5% (unchanged). Notably, our valuation implies a 5-year average Fwd. P/B which we feel is justified given that asset quality risks are looking benign coupled with widening NIM. As total returns are &2%, we reiterated our MARKET PERFORM call. The key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, and (iv) weaker-than expected contribution from BoC.

Source: Kenanga Research - 25 Aug 2017