1HFY23 net earnings of RM2.02b (+27%) and interim dividend of 21.0 sen came within expectations. The group expects to see some pressure on its interest spread but will still uphold tight measures to ensure that its asset quality readings are not compromised. Bank of Chengdu (BOCD) is anticipated to continue contributing generously in associate gains. Maintain OUTPERFORM and GGM-derived PBV TP of RM23.35.

1HFY23 within expectations. 1HFY23 net profit of RM2.02b made up 50% of our full-year forecast and 52% of consensus full-year estimate. An interim dividend of 21.0 sen was declared, which we deem to be in line with our full-year payment target of 70.0 sen (c.35% payout) as the group typically allocates a lumpier final dividend payment during its 4Q results.

YoY, 1HFY23 total income rose by 9% as net interest income gained 6% on the back of a larger loans base (+8%). However, net interest margin was stagnant at 2.02% as intensifying competition in the deposits space are pressuring pricing. Meanwhile, non-interest income grew by 20%, mainly thanks to recovery in treasury and investment activities. Cost-income ratio improved to 36.4% (-0.7ppts) due to the higher top line while annualised credit cost came in at 7bps (-3bps) on more relaxed asset quality stress. Meanwhile, 17.6%-owned associate, BOCD continued to demonstrate solid growth (+36%) from its favourable positioning in Chengdu. All-in, 1HFY23 net profit came in at RM2.02b (+27%).

Briefing highlights. Although the group sought to keep its FY23 targets unchanged, they warned of worsening margin outlook given the tightening competition in deposits products as the migration from CASA to term-deposits would lock prospective customers from moving to different offerings. However, the group anticipates for one more OPR hike which could refresh the margin spread of deposits in the industry. At the meantime, the group’s loans growth appears to expand from strong acquisition in most fronts, the chief being residential, transport vehicle and SMEs which it believes should continue to gain traction. At present, the group commands a management overlay of RM629m. However, they are more conservative than peers as to maintaining these overlays due to prevailing uncertainties and may press for their utilisation. Regardless, HLBANK’s credit cost is one of the lowest in the industry and is expected to maintain their readings even in the event of a downturn. On the flipside, we anticipate BOCD to primarily cater to the growing financing needs in its operating region and generate favourable returns to the group.

Forecasts. Post results, we slightly adjust our FY23F/FY24F earnings from model updates.

Maintain OUTPERFORM and TP of RM23.35. Our TP is based on an unchanged GGM-derived PBV of 1.37x (COE: 9.7%, TG: 3.5%, ROE: 12.0%) against our CY23F BVPS of RM17.05. 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 it is 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-thanexpected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 1 Mar 2023