HLBANK’s FY23 net profit (+16% YoY) was within expectations but disappointed on its dividend payments as we had anticipated a higher payout. The group anticipates moderating growth in FY24 but believes most metrics would remain stable and manageable. Meanwhile, its associate Bank of Chengdu is mostly unaffected by the downturns in China, easing concerns on plummeting contributions. Maintain OP and GGM-derived PBV TP of RM22.65.

FY23 within expectations. HLBANK’s FY23 net profit of RM3.82b made up 97% of our full-year forecast and 99% of consensus full-year estimate. A final dividend of 38.0 sen was declared, totalling to 59.0 sen (32% payout) for FY23. This is below our expectation as our 70.0 sen projections were based on c.35% payout (2-year average) and slightly higher earnings input.

YoY, FY23 net interest income was flattish. Although NIMs were compressed by 15bps, this was made up by an 8% growth in loans base. On the other hand, non-interest income grew by 11% following better treasury and investment performances. Cost-income ratio did see an increase to 39.3% (+1.8ppts) on the back of higher personnel costs from revised collective agreements. Credit costs saw further improvements to 6.6bps (-3.5bps) thanks to write-backs from its preemptive overlays. All in, this led to flattish operating profits while the group’s 19.8%-owned associate, Bank of Chengdu (BOCD) saw contributions increased by 25% on sustained financing growth and lower impaired loans. Overall, FY23 reported net profit came in at RM3.82b (+16%).

Briefing highlights. HLBANK has met most of its headline target for FY23, outperforming its loan growth expectations previously. However, it missed its cost-income ratio slightly (39.3% vs targeted <38%).

1. For FY24, the group is projecting a lower loans growth target of 6%- 7% after its FY23 of 8% delivery. It kept its target conservative as it anticipates inflation to still weigh down on the demand for borrowings with the higher rate environment also being unsupportive. That said, the group believes they can continue to outpace industry trajectory given their strong presence in mortgage and commercial banking.
    
2. NIMs are expected to remain stable between 1.8%-1.9% as the group opines that the milder competitive landscape at present would remain. We believe banks would try to reoptimize their profit rates after facing off strongly in deposit rates in the past quarters until we experience another OPR hike.
    
3. Credit cost is expected to remain well-managed by the group, expecting it to stay below 10bps with a gross impaired loan reading of <0.70%. Although the group has been progressively writing back on its overlays, it maintained a buffer of RM574m against future uncertainties.
    
4. With regards to BOCD, the group has increased its stake to 19.8% from 17.6% following the exercise of convertible bonds which translated to higher associate contributions. However, the group believes that other bond holders would subsequently exercise their respective conversions in the coming periods to reduce HLBANK’s effective holdings.
    
5. For the time being, BOCD appears mostly unaffected by the downturn in China’s property market given its lack of exposure to affected names. Meanwhile, property development loans only make up 7% of BOCD’s books.

Forecasts. Post results, we slightly adjust our FY24F earnings from model updates. Meanwhile, we introduce our FY25F earnings which reflect a 2% earnings growth. We anticipate normalisation of pressures from core operations to come in FY24 which may then moderate.

Maintain OUTPERFORM and TP of RM22.65. Our TP is based on a GGM-derived PBV of 1.21x (COE: 10.4%, TG: 2.5%, ROE: 12.0%) based on a CY24F BVPS of RM18.70. 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 Sept 2023