Bank of Chengdu continued its upward momentum contributing 16% of the group’s pretax profit as top-line moderated, underpinned by soft loans and NIM. We expect Bank of Chengdu to maintain its upward momentum ahead into FY19. TP revised slightly upwards to RM18.70 but reiterate our MARKET PERFORM call.

In line. HLBANK 9M18 CNP of RM2.01b is above both our and market estimates of 83%/79% on account of stronger-than-expected contribution from its 18% associate (post listing) Bank of Chengdu (BOCD). No dividend was declared, as expected, for the quarter.

Earnings driven by BOCD. 9M18 CNP was driven by higher contribution from BOCD at >16% of its PBT or at RM419m (>+62% YoY). Top-line moderated at +8% YoY driven by fee-based income (+13%) and Islamic banking income (+19%), mitigated by soft fund- based income of +4%. Soft fund-based income was underpinned by soft loans (+1.6% vs system loans of +4.4% and guidance/estimation of 3-4%) and soft NIMs (4bps expansion vs estimation of 9bps expansion). The soft NIM was due to a strategic move of shoring up deposits before the Jan 18 OPR hike. CIR was at 42% (vs guidance/estimation of 44% and industry’s 48%) as top-line outpaced opex. Further improvement in asset quality as GIL fell by 4bps to 0.8% with credit charge falling by 4bps to 0.07% (vs our expectation of 0.15).

QoQ, CNP was subdued at +1% as top-line moderated to +2%. BOCD performance moderated to +5% (contributing >15% of PBT). Fund- based income fell 5% as loans fell marginally (-0.1%) with NIM falling by 6bps due strategic move of shoring deposits. Thanks to BOCD, annualized ROE was up by 140bps to 11.6% (vs. guidance/estimation of 10%/11%).

Soft loans ahead but robust BOCD. Management revised its loan target to <3% for FY18 due to expected compression from corporates from the recent political developments. Residential property and SME are still looking solid. We revised our FY18E NIM estimation with a 4bps expansion (vs 9bps previously) due to hike in funding costs in 3Q18. Moving forward into FY19, we expect slight increase in NIM on account of stable loan pricing and moderate increase in funding costs mitigated by strong CASA. We expect BOCD to remain robust with pre- tax contribution rising to 15-16% (from 13-15% previously) into FY19 as its loans will be coming from the robust SME and government-linked projects in China. Management guided for a minimal impact from MFRS9 on CET1 for FY19. We thus revised down our credit charge to 7bps/15bps for FY18 from 15bps/20bps previously.

Revised earnings. We revised up our FY18E/FY19E earnings estimates conservatively by +3%/+2% to RM2.48b/2.57b on account of stronger contribution from BOCD but mitigated by slower loans.

TP revised with call maintained. Our TP is now at RM18.70 (vs. RM18.40 earlier) based on an unchanged 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 upside bias on NIM and downside bias on credit charge ahead. Reiterated our call of MARKET PERFORM as total returns are <5%.

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 BOCD.

Source: Kenanga Research - 31 May 2018