FY22 net earnings of RM3.29b (+15% YoY) are better-than-expected thanks to stronger results from its associate Bank of Chengdu (BOCD). Meanwhile, full-year dividends of 55.0 sen were well anticipated. HLBANK continues to be presented as highly sustainable with low exposure to credit charges despite a growing loans book. BOCD should also continue to leverage better prospects in its region. Maintain OP with a higher GGM-derived PBV TP of RM23.30 (from RM22.95).

FY22 beat our expectations. FY22 net earnings of RM3.29b exceeded our full year forecast by 8% but came within consensus full-year estimates (making up 103%). The positive deviation was mainly due to better-than-expected results from its 18%-owned associate BOCD of which we were previously more cautious on amidst uncertainties in China’s operating landscape. Meanwhile, a final dividend of 37.0 sen (full-year payment of 55.0 sen at 35% payout) is in line with our anticipated 56.0 sen despite our softer earnings forecast due to our higher assumed payout of c.40%.

YoY, FY22 total income rose by 2% mainly due to stronger NII performance (+7%) on a loans growth of 8% which outpaced expectations (6-7%) while NIMs were well contained (2.00%). This was mitigated by a 14% decline in NOII owing to weaker trading and investment results. Thanks to the higher topline, CIR improved to 37.5% (-0.5ppt) amidst flattish costs (+1%). The year reported a credit cost of 10 bps (-33 bps) following a release of preemptive provisions of RM183m (with a balance of RM639m) on specific accounts. Meanwhile, BOCD provided associate contributions of RM1.08b (+40%) supported by heightened loans growth in its retail and industrials segments. All-in, FY22 net profit reported at RM3.29b (+15%).

Briefing highlights. With the closing of its FY22, the group has fully met all of its targets and even exceeded some in terms of loans growth thanks to acquisitions in all fronts, but mainly led by new corporate accounts as well as mortgages. Looking towards FY23, the group stands to be slightly more conservative as macro uncertainties and headwinds do not appear to be easing. Reflecting this in its guidance, slightly lower loans growth (7%) and higher credit costs (10-15 bps) could be anticipated although we do not see this to be detrimental as the group has already made significant headway even during the pandemic. The group’s repayment assistance mix of 3% also appears to be one of the lowest amongst its peers. Meanwhile, BOCD is expected to be largely unaffected by the rising risks borne by its larger national contemporaries given their smaller exposure in real estate markets.

Forecasts. Post results, we raise our FY23F earnings by 6% on full-year model updates and incorporating better associate contributions. Meanwhile, we also introduce our FY24F numbers with suggest a more moderate EPS growth of 3% as NIMs may be strained by competitive interest rates. Our current assumptions do not factor provision writebacks.

Maintain OUTPERFORM with a higher TP of RM23.30 (from RM22.95). Our TP is based on a higher GGM-derived PBV of 1.37x (COE: 9.7%, TG: 3.5%, ROE: 12.0%) from 1.34x as we raised our TG by 0.5ppt. This is against our CY23F BVPS of RM17.00. We continue to view the stock as a solid pick for investors seeking stability, as the group’s GIL ratio remains to be one of the lowest amongst peers whilst still able to generate better-than-industry loans growth. Meanwhile, BOCD is expected to be a sustainable contributor in the near term. That said, dividend expectations are moderate against the group’s emphasis for sustainable payments. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 1 Sept 2022