HLBANK 6M18 exceeded our expectations accounting for 56% of our estimates on account of stellar contribution from its China associate. A DPS of 16 sen was declared (in line). We raised our TP to RM18.40 and upgrade our call to MARKET PERFORM.

In line. HLBANK 6M18 CNP of RM1.32b is above ours /in line with market accounting for 56%/55%% of full-year estimates. The positive deviation was due to lower than expected credit charge and tax rate coupled with a better than expected contribution of its China associate. An interim DPS of 16 sen was declared (within expectations).

Earnings driven by BOCD. YoY, 6M18 CNP saw a stellar improvement of 21.0% driven by stellar contribution from its 20% associate Bank of Chengdu (BOCD) by +100.7%. Topline growth was at +5.8% underpinned by strong Islamic Banking Income (+18.1%) and fund-based income of +6.4% but offset by contraction in fee-based income at 1.1%. Fund-based income was driven by 7bps expansion in NIM (vs. guidance/expectation of >9bps/9bps) as loans growth was soft at +1.8% (vs. our expectations/guidance of <6%/5-6%). With opex slower than topline at +3.2%, CIR improved by 110bps to +42.5% (vs industry/our expectation of 48.1%/<44%). Asset quality deteriorated slightly with GIL rising by 11bps to 0.97 (vs system GIL of 1.53% and credit costs was flat at 0.09% (vs our expectation of 0.15%). QoQ, CNP was commendable at +6.9% underpinned by soft topline at +4.2% and falling impairment allowances of 75.9% with its associate contribution fell by 14.5% due to higher provisioning. Top-line was driven by feebased income (+16.1%) but offset by Islamic banking income (-1.9%) with fund-based income soft at 1.1%. Fee-based income was soft drag by marginal loans (+0.6%) and NIM compression of 2bps.

Soft loans ahead but robust BOCD. Management revised its loan target to 3-4% (from 5-6%) due to compression from corporates and sooner than expected repayments. New lines have not been drawdown yet with market shares in both HP and credit cards coming down due to competitive rates/aggressive marketing by peers. We do not expect downward pressure on NIM as liquidity is ample due to i) its compliant with NSFR and ii) tepid loans growth. Moving forward into FY19, we expect slight increase in NIM on account of stable loan pricing and moderate increase in funding costs mitigate by strong CASA. Its overseas contribution, Bank of Chengdu is expected to stabilize and robust with loans targeting at the 6-7% range coming from SME’s and government-linked projects. We estimate that BOC contribution will rise to 13-16% to HLBANK’s pretax profit.

Revised earnings. We revised our FY18E/FY19E earnings conservatively by 4%/6% to RM2.41b/2.50b on account of stronger contribution from BOCD.

TP revised with call upgrade. Our TP is now at RM18.40 based on a blended FY19E PB/PE of 1.54x/14.5x. Our valuation implies a 1.0SD/2.0SD above the PB/PE 5-year mean. We feel this is justifiable given the robust contribution from BOCD and strong NIM ahead. Upgrade our call to MARKET PERFORM as total returns are <5%

Source: Kenanga Research - 27 Feb 2018