We came away from a conference call with Malkit Singh, its CFO, feeling reassured on the near-term outlook of HLBANK. The impact from MCO 2.0 on the group’s retail loan portfolio is mitigated by more international trades. Higher PRAP was booked in but management see no reason for alarm and maintains its guidance. NIMs should benefit from the higher CASA mix while stronger NOII should buffer against higher CIR in 2HFY21. We believe any positives are already fairly priced in at current level. Maintain MP and TP of RM17.80.

Unshaken by MCO 2.0. The implementation of MCO 2.0 in Jan 2021 inevitably slowed the momentum of economic recovery with opportunities lost on heavy CNY restrictions. That said, loan demand benefitted from more international trades which offset the decline in domestic accounts. In 3QFY21, the group had extended its PRAP (Payment Relief Assistance Program) by RM2.4b (outstanding of RM12.7b, total issued of RM18.4b) owing to retail accounts which we believe is telling of the impact from prolonged economic weakness, Still, management is unhindered as most of these accounts are mortgage-secured (c.90%) while the previous at-risk accounts are regaining financial health and resuming payments. The group’s FY21 target for loans growth is c.6% (1HFY21: 6.2% vs our FY21E: 5.2%).

Credit cost buffers intact. The group has frontloaded on loan provisions in 1HFY21 as a prudent measure against higher impact uncertainties from Covid- 19, booking a total credit cost of 23 bps. Management is confident that previous guidance of 30 bps should sustain up till 4QFY21 despite the abovementioned PRAP, being supported by older accounts regaining their financial health.

High CASA levels should be favourable to NIMs. During the 1HFY21 results release, management updated its FY21 NIMs target to be greater than 2% (vs our applied FY21E: 1.8%). It also posted a CASA-to-deposit ratio of c.30%. Management highlighted that CASA deposits are continuing to grow given customers’ appetite to hold cash which should translate to lower cost of funds in the coming quarters. This should support further expansion of NIMs. On the flipside, NOII is expected to be buoyant as wealth management products are performing favourably with credit card transactions picking up in March with the loosening of movement controls. However, trading income suffered some setbacks due to less vibrant market conditions.

Operating expense to pick up with festivities. Making up for the lull in 1HFY21, management look towards increasing its marketing activities that coincide with the upcoming Hari Raya celebrations. That said, CIR is expected to remain in check, within the group’s guidance of <43% (vs our FY21E: 39%, 1HFY21: 37.6%). Operationally, the growing adoption of digital mediums could also help to ease back-end costs.

Post-update, we left feeling assured by the group’s position in the market. HLBANK has also been touted for having a light operating structure while also keeping its asset quality at high but sustainable levels (<1%). Given these buffers, the group should have much leeway to navigate around potential worsening of market conditions. Management also aspire to alleviate dividend payments back to its pre-Covid rate of close to 40% when conditions are favourable. However, we maintain MARKET PERFORM and TP of RM17.60. Our TP is based on a GGM-derived CY22E PBV of 1.10x (0.5SD below 5-year mean). At current price level, we believe all positives have been fully priced in. At the same time, the group dull in comparison to its peers in terms of dividend payments could give little incentive to new investors. We recommend accumulation only on weakness when potential capital gains are more favourable.

Risks to our call include: (i) higher/lower-than-expected margin squeeze, (ii) higher/lower-than-expected loans growth, (iii) better/worsethan-expected improvement in asset quality, (iv) stronger/weaker capital market activities, and (v) favourable/unfavourable currency fluctuations.

Source: Kenanga Research - 13 Apr 2021