Results are in line, but earnings growth was soft due to compressing NIM and weak fee-based income despite loans exceeding expectations. Nevertheless, asset quality improved with negligible credit loss while BOCD stayed resilient. Moving forward, we subscribe to a lower 5-year mean FY20E PBV (with a slightly risk premium); thus, reducing our TP to RM17.30. Maintained at MARKET PERFORM.

In line. 12M19 CNP of RM2.67b is in line, accounting for 99%/98% of our/market estimates. A final DPS of 34.0 sen was declared bringing total DPS to 50.0 sen (vs expectation of 48.0 sen).

YoY, overall, growth was soft as CNP was marginally up (+1%) as top line fell 2% led by both NII (-5%) and NOII (-4%) with Islamic Income pushing ahead at >+9%. Its 18% associate BOCD continued to improve, with PBT contribution recording 2ppt uptick to 18% or RM563m in PBT.NOII fell, dragged by weakness in trading income (- 36%) to RM396m (coming from soft gains in sale of financial assets; - 73% to RM64m and lower MTM to RM53m or -50%). Despite loans growth (+7%) coming above expectation/industry (~+5%/~4%), the widening NIM compression (reported: 14bps) dragged NII. Asset quality continued to be healthy with GIL at 0.78% (2nd after PBANK) with credit charge down (5bps) to 0.01%. While gross credit charge saw an uptick in the last three quarters, consistently strong credit recoveries saw muted credit costs. Its 18% associate BOCD continued to improve, with PBT contribution recording 2ppt uptick to 18% or RM563m in PBT.

QoQ, CNP growth was marginal (+0.4%) to RM636m as higher NIM compression and impairment allowances dragged earnings. The flattish top-line was mitigated by a strong NOII (+13%) to RM324m, driven by investment & trading income; +48% to RM137m due strong gains from sale of financial assets (>+100% to RM117m). The declining NII (-3%) was dragged NIM compression (reported: 11bps) despite loans charting a strong performance (+3%) since 4Q15. Opex grew in tandem with revenue holding CIR stable at 45%. Asset quality was mixed with GIL shedding 2bps to 0.78% while credit costs saw an uptick of 13bps due to uptick in gross credit loss of 11bps to 0.28%.

Management guided for a ROE of ~11% driven by healthy loans (+5- 6%), with NIM expected to improve above 2%. Loans will be driven by retail, mortgages, SME and PF. NIMs look likely to improve with deposits intake to be subdued with the low LDR (84%). Given that more focus on unsecured retail provisioning is likely to be higher, management guided for a credit charge of 10-12bps. We believe that BOCD will still play major part in the Group’s growth given that its LDR of 57% provides plenty of room for growth with NII the main driver. Note that 74% of its loans are from corporates and SMEs plus the added positive that BOCD are focused more on its domestic region.

Forward earnings revised. Our FY20E earnings are revised by -9% based on these conservative assumptions; (i) loans at~+5.5% (from +4%, ii) CIR at 43% (unchanged), (iii) 4bps compression in NIM (from 1bps) , (iv) credit charge at 0.10% (unchanged) and BOCD growth of ~7% (from +9%). We introduced our FY21E earnings, where we expect slight improvement in earnings by ~7% to RM2.8b on account of higher loans, higher NIM and better contribution from NOII.

TP lowered, and call maintained We reduced our TP to RM17.30 from (RM20.05) subscribing to a lower FY20E PBV of 1.3x (from 1.5x) implying a 0.25SD below mean to reflect SLIGHT concerns ON BOCD with the uncertainties still prevailing. We feel this is justifiable as HLBANK added advantage of excellent asset quality. Valuations are stretched despite the recent downturn in its share price; reiterate MARKET PERFORM.

The key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset

Source: Kenanga Research - 29 Aug 2019