We hosted a meeting with HLBANK’s CFO, Mr. Malkit Singh for updates and came out reassured of the group’s near-term prospects. The group’s diversified books enables it to leverage on the broad scale economic recovery with GIL ratios (better than pre-pandemic levels) leaving the group less exposed to singular industry risks. NOII may decline but this is offset by the much lower credit cost expectations. Maintain OP and TP of RM22.70. We feature HLBANK as one of our banking Top Picks for 2QCY22.

Loans trajectory secured and intact. During the recent 1HFY22 results briefing, management raised their loans growth guidance to 6-7% (from 5-6%; YTD: 6.7%). The group remains a beneficiary of SMEs picking up pace in a rejuvenated economy whilst households continue to take advantage of the low interest rate environment. For now, supply-chain disruptions stemming from the Russia-Ukraine conflict is unlikely to impact the quality of the group’s assets.

Sustainable repayments a key consideration. With regards to the possibility of writebacks, HLBANK is in tune with BNM’s preference of withholding reversal of provisions until the medium term (3-6 months) health of its books can be firmly established. At present, HLBANK has RM873m provisioning buffers in place which are likely reserved for the most part of FY22. Meanwhile, the group’s repayment assistance pool continues narrowing as troubled accounts graduate from the program. The balance as of Mar 2022 stands at RM7.6b, less than 5% of total financing (Feb 2022: RM10b, Dec 2021: RM33b).

Targeted products to keep cost of funds viable. Banks are seen aggressively competing to acquire cheap deposits ahead of expectations for at least one OPR hike in 2HCY22. The group navigates this with targeted term deposit products to sustain interest costs for the medium term. CASA strategy (FY22 target: >30% mix) of mainly tapping on digital propositions with collaboration with e- commerce platforms is proving to be a sticky means of capturing and retaining customers. To recap, every 25 bps OPR increase is expected to translate to a 3-4 bps rise in annualised NIM.

A note on non-financing income - NOII is expected to be softer as fixed income streams are expected to trend adversely with interest rate movements. This is cushioned by credit card streams improving in line with the higher spending from the economy reopening. That said, the lower NOII is not a detrimental factor to the group’s earnings as credit cost (FY22 guidance: 10 bps, 1HFY22: 5 bps vs FY21: 43 bps) is also significantly deflated. Meanwhile, 18%-owned associate, Bank of Chengdu (BOCD) could continue to contribute nicely to bottom-line earnings. At present, there may be some concerns as to the impact of restrictive lockdowns in China. However, we opine that even if this was to affect the bank, its c.20% earnings growth expectations should still cascade to HLBANK considerably after taking on a few hits.

Post meeting, our assumptions are mostly unchanged.

Maintain OUTPERFORM and TP of RM22.70. Our TP is premised on an unchanged GGM-derived CY23E PBV of 1.34x (within its 5-year mean). We believe HLBANK is suitable for defensive-oriented investors. The group’s better than pre-Covid GIL ratio provides the group solid buffers if we were to expect macro factors to gradually worsen. YTD, it is one of the industry’s lowest at 0.46% (vs FY18: <1.0%). While management has kept its guidance prudent at 0.8% of FY22, we believe it is unlikely that such levels will be triggered, lest an industry-wide swing were to occur. In addition to a leading ROE proposition, the group’s investment in BOCD provides exposure to the high growth economy in China, poised to offer c.20% earnings growth in the near term. HLBANK is one of our Top Picks for 2QCY22.

Source: Kenanga Research - 5 Apr 2022