9MFY21 earnings of RM2.17b (+13%) was within expectations. Management is confident on its near-term prospects despite tighter movement controls recently. Data analytics will aid the group is gaining market share while cost and asset quality controls are still tightly held. Associate performance is expected to be better thanks to China’s economic recovery. Maintain MARKET PERFORM and GGM-derived PBV TP of RM17.80.

9MFY21 within expectations. 9MFY21 net earnings of RM2.17b is within expectations, making up 76%/79% of our/consensus respective full-year estimates. No dividends were declared, as expected as the group typically pays its dividends semi-annually.

YoY, 9MFY21 reported a NII spike of 18% thanks to better NIMs (1.99%, +17 bps) from cheaper cost of funds fuelling a loans growth of 7%. NOII also increased by 6% on strong investment gains. Overall, total income rose by 15% to RM4.16b. The stronger revenues reduced CIR down to 37.4% (-6.8ppt) as operating expenses (-2%) was mostly softer, save for personnel cost. Overall, these gains were mitigated by the group booking heavier loan provisions (+234%) amidst economic challenges posed by the Covid-19 pandemic. This drove credit cost to 41 bps (+28 bps). With that, net profit for 9MFY21 registered at RM2.13b (+13%) as better associate gains (18%-owned Bank of Chengdu) was offset by higher effective taxes. GIL (0.5%, -0.5ppt) for the period benefitted from tighter asset quality controls while CASA-to- deposit rose to 31.4% (+4.9ppt) as customers prefer cash liquidity during times of economic uncertainty.

QoQ, 3QFY21 total income was flattish at RM1.39b as poorer NOII trading performance (-8%) was cushioned by a slight nudge in NII (+1%) thanks to a larger loans portfolio. Notably, impairments during the quarter was 53% lower due to frontloading of provisions in 2QFY21 on Covid-19 uncertainties. This led to net earnings to improve by 15% to RM771.5m.

Key briefing highlights. Nearing the tail end of its financial year, management is confident that HLBANK could exceed some of its targets, firming up some better numbers for its June-Year End despite the reimplementation of MCOs in the past months. The group looks to capitalise on data analytics to boost its presence within the SME space to offer targeted facilities based on their needs. Asset quality continues to be of high importance with the management still being on high alert in the event local economic recovery does not pace as expected. Meanwhile, the group’s NOII mix is expected to remain fairly balanced with weaknesses its credit card business to be supported by its wealth management arm. Management also anticipates better associate gains to come with the Bank of Chengdu appearing poised to benefit from the economic recovery in China as it shies away from Covid-19’s socioeconomic impact.

Post-results, we tweak our assumptions slightly from model updates.

Maintain MARKET PERFORM and TP of RM17.80. Our TP is based on a GGM- derived CY22E PBV of 1.10x (1.5SD 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/worse-than-expected improvement in asset quality, (iv) stronger/weaker capital market activities, and (v) favourable/unfavourable currency fluctuations.

Source: Kenanga Research - 28 May 2021