9MFY23 net profit of RM2.95b (+24%) came within expectations. HLBANK is expecting some moderation in its loans and interest margins. However, they still maintain stellar asset quality readings from prudent management and strategies. Even if there is slowing growth in domestic operations, its associate Bank of Chengdu (BOCD) remains bullish in its earnings delivery. Maintain OUTPERFORM with a higher rolled-over GGM-derived PBV TP of RM25.00 (from RM23.35).

9MFY23 within expectations. 9MFY23 net profit of RM2.95b made up 73% of our full-year forecast and 76% of consensus full-year estimates. No dividend was declared this quarter as the group typically announces it dividends biannually.

YoY, 9MFY23 net interest income was flattish as a 7% loans growth was offset by 13 bps compression in net interest margins (NIM). On the flipside, non-interest income spiked 41% from a strong recovery in treasury and investment activities. Cost-income ratio was also relatively stagnant at 37.6% as higher operating expense (+7%) was in tandem with income growth. Meanwhile, credit cost registered at 8 bps (-3 bps) as asset quality staging improves. The group’s 17.6%-owned associate, BOCD delivered sustained growth (+32%) from its strong positioning in Chengdu. Overall, 9MFY23 reported net earnings of RM2.95b (+24%).

Briefing’s highlights. Prospects on local soil may appear more neutral in the near-term, but we believe BOCD would continue to be a solid contributor to bottomline.

1. Narrower loans growth target at 7% (from 7.0%-7.5%) was updated as there could be moderating demand in key residential property and transport vehicles segments. That said, the group is persistent in its SME acquisition strategies.

2. NIMs may remain stable in the immediate, albeit at a lower level than 1HFY23 owing to pre-rated offerings. While the 25 bps OPR hike in May could help support NIMs, the group opines it may close the year at a 2.00%, lowering its initial 2.14% guidance.

3. Focusing on its key markets, the group may not adopt overly aggressive pricing strategies to secure liquidity, which it believes is ample. This could help to defend NIMs as industry rate normalises.

4. Asset quality remains unconcerning, with gross impaired loans being mostly held by specific accounts. The existing overlay of RM614m (-RM16m QoQ) is maintained in lieu of revisions possibly arising from a pending stress test in June.

5. BOCD saw strong earnings momentum given its high penetration in an accelerated corporate landscape in Chengdu, making up to 80% of its portfolio. Its 30% loans growth will likely offset the impact towards earnings from rate hikes in China.

Forecasts. Post results, we slightly adjust our FY23F/FY24F earnings from model updates. Although the group toned down their loans growth and NIM guidance, we had already factored conservative levels in our assumptions, hence leaving them mostly unchanged (i.e. loans growth 6%, NIMs <2.00%).

Source: Kenanga Research - 1 Jun 2023