1QFY18 is in line, accounting for 27% of both our/market estimates with YoY and QoQ earnings improving tremendously at 18% YoY and 32% QoQ. No dividend declared as expected. We maintain our TP of RM15.25 and reiterate our MARKET PERFORM call as valuations could have stretched.
In line. HLBANK reported a strong start to its FY18 with 1QFY18 earnings growing by 32% QoQ and 18% YoY to RM639.0m, accounting for 27% of our/consensus full-year estimates. Despite softer loans vs. guidance, there was positive traction from its NIM supported by strong contribution from its associate Bank of Chengdu (BoC).
YoY, 1QFY18 CNP of RM639m was underpinned by strong top-line growth of 8% supported by its associate BOC, which grew by 60% contributing 20% to its PBT. Top-line was driven by Islamic banking income (+23%) and fee-based income (+7%) with fee-based income at +1%. Fee-based income was driven by soft loans at +3% (vs guidance/expectation/industry of 5-6%/~6%/5.3%) with expanding NIM of 12bps (vs guidance/expectation of >9bps/9bps). With opex rising by only +3%, CIR improved by 2ppts to +43%. Asset quality deteriorated slightly with GIL rising by 14bps to <1% and credit costs up by 6bps to 0.14%. QoQ, CNP was stellar underpinned by falling impairment allowances of 32% and associate contribution rising by +44%. Top-line was soft at +2% driven by Islamic banking income (+12%) with feebased income soft at +2% and fee-based income falling by 1%. Fee based income soft drag by flattish loans (-0.2%) but mitigated by expanding NIM by 5bps.
Pickup in 2HCY18. We expect loans to pick up in 2H18 on the back of a supportive economic environment. 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 the management's target. It’s 20% associate BoC is expected to stay robust with focus on SMEs and government-linked landed projects. We expect a dip in ROE for FY19 due to the impact of MFRS taking place by 1 Jul 2018.
Unchanged earnings. We maintain our FY18E/FY19E earnings of RM2.34b/2.38b.
MARKET PERFORM call maintained with unchanged TP. Our TP is maintained RM15.25, based on 1.33x FY18E P/B (GGM derived) with COE of 8.25% (unchanged), FY18 ROE of 10.16% (unchanged) 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 valuations are a bit stretched, 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 - 4 Dec 2017
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