As expected, HLBANK’s results came in line given the rebound in top line post Modification loss impact in 4QFY20 and robust International operations. While management is still cautious ahead domestically, we are encouraged by its overseas operations delivering robust earnings. TP is raised to RM18.50 on higher valuations with OUTPERFORM call maintained.

In line. 1QFY21 CNP of RM729m (+6% YoY) came at 26%/27% of our/market estimates. No dividends announced which are generally declared in Q2 and Q4.

YoY, improvement in CNP was driven by top-line (+11%) which was underpinned by strong growth performance from NII leading the charge at +13% and Islamic Banking coming in at +9%. Loans/Financing saw strong performance (+7%) coming from Business Banking (+13%) and Mortgages (+8%). NIM was fairly stable with the repricing of deposits helping cushion the impact of the OPR cuts. Opex was tightly controlled and with positive JAW, CIR improved 4ppt to 39%. Higher loan impairment allowances of RM104m (or credit charge of 29bps) was expected given management had earlier guided for front loading for 1QFY21 (bulk of it coming from management overlays). LLC jumped to 190% due to pre-emptive provisioning buffer of RM539m. Asset quality saw its best performance ever with GIL improving by 33bps to 0.48%. Its 18% associate BOCD continued to be robust at +15% and contributing 19% to PBT.

QoQ, CNP saw 28% uptick to RM729m as top-line surged 13% and on lower impairment allowances. Excluding the Modification losses last quarter, top-line was mainly underpinned by stronger NoII. Impairment allowances fell 45% as bulk of the provisioning had been done in the previous quarter. After two consecutive quarters of decline, BOCD saw a rebound at +1.6%

Briefing’s highlights. No change in outlook as management looks for a doable loans target of 5-6% given the strong pipeline and more relief from SFR funds. This is further enhanced by its strong International Operations with the Indo-China market seeing double-digit annual growth. BOCD is expected to remain solid, given that its region of operations are not affected by Covid-19 with asset quality looking resilient thus far. Assuming no further OPR cut and continued loans growth, NIM is expected to improve in the coming quarters with Modification losses expected to be negligible. Opex is expected to be stable given earlier digitisation initiatives. Management kept the credit charge guidance of 15-20bps as well as their guidance on GIL ratio is <1%. Currently, HLBANK’s Payment Relief Assistance Plans amounted to RM12b (or 8% of loans/financing) of which 78% are for retail customers. Since the inclusion of B40 segment, management has not seen any significant spike. Liquidity and capital look solid with Loan to Funds & Equity Ratio at 74% while CET-1 ratio stood at 13.8%, giving ample room for the Board to declare dividends for FY21.

Post-results, we make no changes to our FY21E/22E earnings.

Valuations revised. We revised our TP to RM18.50 (from RM17.00) based on a GGM-derived CY21E PBV of 1.2x (from 1.1x) as we reduce our risk-free rate and market-risk premium by 30bps and 25bps, respectively, to 2.7% and 6.5%. We like the bank given its financial prudence – conservative opex supported by a resilient NIM, healthy asset quality and a robust BOCD and international operations with positive vaccine developments providing further upwind. Reiterate OUTPERFORM.

Key risks to our forecasts are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) weaker-than expected contribution from BOCD, and (v) new wave of the pandemic.

Source: Kenanga Research - 30 Nov 2020