We view Hong Leong’s 9MFY20 results as broadly tracking expectations (ex-modification loss). Asset quality looks contained but uncertain ahead post moratorium. BOCD’s contribution is looking to shrink given the strained economy. Our conservative earnings estimates are unchanged; hence, TP of RM13.40 and MARKET PERFORM call maintained.

Within expectations. 9MFY20 of RM1.92b (-5% YoY) came in at 82%/74% of our/consensus full-year estimates. We consider the results to be within our expectation as NIM compression was meagre (1bps YoY vs our expectations of 6bps compression - inclusive of Day 1 modification impact). Further positive deviations from our estimates are: (i) higher-than-expected loans growth of +6.6% YoY vs. estimate of +5.3% YoY, and (ii) lower credit charge at 13bps vs. our estimated 16bps.

Resilient loans. YoY, top-line saw meagre improvement (+1%) to RM3.58b stemming from fund-based income – underpinned by mortgages (+9%) mostly as Islamic Banking surged 15%. Fee based income (-8%) came within 70% of our estimate – dragged by forex (- 46% to RM66m) and the one-off divestment gain of RM90m in 1H19. PBT fell 5% due to higher provisioning - RM136m vs. 9MFY20: writeback of RM35m (credit cost of 13bps vs credit recovery of 4bps). Its Chinese associate Bank of Chengdu (BOCD) saw a 13% improvement to RM478m at 20% contribution to PBT. Loans (+6.6%) was driven by International Operations (+21% to RM1.4b), Business Banking (+7% to RM2.3b) and Retail (+5% to RM5.2b). Domestic loans saw +6% improvement with Singapore leading overseas (+14% to RM5.6b). Gross Impaired Loans (GIL) saw 18bps uptick to 0.98% but well covered with Loan Loss Coverage (LLC) at 159% (Inclusive of Regulatory Reserves). Management guidance of ~10% ROE is still on track with ROE ending the period at 9.9%. QoQ, as expected was dismal with CNP falling 24% to RM535m. Top-line fell 9% to RM1,129m dragged by fee-based income (-20%) to RM243m exacerbated by NIM compression of 20bps despite loans growth slightly marginal (+1%). As guided before, provisioning was up by >500% to RM126m with RM65m added for the quarter to buffer against the strained economy. Asset quality deteriorated by 14bps for the quarter mostly coming from mortgages.

Guidance. Management guided for loans growth to be in the 6-6.5% range for FY20 and +~6% for FY21. This optimism is based its loan stock availability (mortgage: RM10b and SMEs: RM1.6b). GIL is expected to come down to its Dec 2019 level (0.84%). The uptick in GIL was due to customer confusion on the implementation of moratorium period which saw a number of customers deferring their payments. Prudent management saw GIL falling and management expects GIL dropping by 20% (in absolute numbers from March 20) by June 2020 and another 10% by Sep 2020. Credit cost is expected to end at ~13bps with provisioning for FY21 expected to end at RM150-200m (15-20bps) or in the worst-case scenario at RM250m (25bps). While asset quality will improve in the coming months, management are cautious post moratorium hence the higher provisioning for FY21. Given the 50bps cut in May, we expect another 3bps compression with FY20 NIM to end at 1.94% which would be in line for our expectation of NIM compression of ~6bps for FY20. Management insist impact modification loss will be small as on-going issues are still in contention with rising traction in customers paying during the moratorium (35% as of May).

Earnings maintained. We resists in making changes to our FY20E/FY21E earnings of RM2.3b/RM2.4b as we feel our assumptions are conservative enough such as; (i) loans growth at +5.%/+5%, (ii) NIM at -6bps/-1bps, (iii) credit charge at 16bps/15bps and (iv) BOCD growth of ~7% for both FYs. MARKET PERFORM and TP of RM13.40 maintained. Our TP is based on a GGM-derived PBV of 1.0x ascribed to FY20E BVPS. While we view its loans target doable, asset quality issues post moratorium is still uncertain with the on-going pandemic and economic woes.

Source: Kenanga Research - 1 Jun 2020