HLBANK’s 1QFY24 net profit (+5%) met expectations, but was mainly carried by stronger contributions from its associate Bank of Chengdu. Domestically, the group may require further strides to grow both its loans and deposits profile. For some relief, it has ridden through the worst of the deposits competition spurred by past OPR hikes. Maintain OUTPERFORM and GGM-derived PBV TP of RM24.20.

1QFY24 within expectations. HLBANK’s 1QFY23 net profit of RM1.03b made up 25% of our full-year forecast and 26% of consensus full-year estimate. No dividend was declared, as the group typically pays biannually.

YoY, 1QFY24 net interest income declined by 7% despite loans portfolio also expanding by 7%. This was owing to comparatively suppressed NIMs (1.75%, -28bps) where 1QFY23 has yet to face the intense deposits competition seen in the industry. Non-interest income also fell (-6%) on softer trading performance. Meanwhile, operating expenses rose by 3% on higher personnel cost, which caused costincome ratio to creep up to 39.9% (+3.9ppts). On the flipside, the period saw a net write-back of RM51.1m (1QFY23 net impairment: RM37.6m). Alongside higher contributions from the group’s 19.8%-owned associate, Bank of Chengdu (BOCD) by 34%, 1QFY24 net profit reported at RM1.03b (+5%).

QoQ, 1QFY24 total income rose by 7% on both strong net income and non-interest income results. However, we noticed that loans base was flattish, attributed to the expiry of certain trade assets. Deposits also fell (-1%) from the exit of large financial institutions, which were also pegged on higher rates. Similarly, due to a net write-back position and higher BOCD results (+5%), 1QFY24 was stronger by 19%.

Briefing highlights. Going into FY24, the group seems to be confident to meet most of its headline targets per 1QFY24’s performance. That said, it fell slightly short on its CASA target of >30% which the group believes it can address over time.

1. Despite a flattish QoQ trajectory to gross loans, the group maintains that its +6%-7% YoY growth could be achieved through more acquisitions on its commercial banking and SME units. This is pegged on the consecutive growth in overall industry readings. As a retail-centric bank, we reckon HLBANK may depend more on mortgages to build its books.

2. Likewise, its declining deposits base would likely be caught up as the group optimises its funding sources towards stickier yet less expensive accounts. While the group’s deposits mix may see higher fixed deposits at the moment, this could possibly gravitate towards more CASA.

3. While the group reported a net write-back during the quarter, its target of c.10 bps remains unchanged owing to prudence. That said, it still maintained its management overlay of RM574m which could be utilised upon defaults. While the group’s gross impaired loan readings appear stable, it did see some minor upticks in its SME portfolio.

4. BOCD continues to be confident with its growth prospects thanks to its detachment from wider property sector concerns plaguing major Chinese markets. Regardless, it holds a sizeable loan loss coverage ratio of 500% to cushion against unfavourable swings in economic conditions.

Forecasts. Post results, we tweak our FY24F/FY25F earnings by -2%/+2% from model updates on 1QFY24’s inputs.

Maintain OUTPERFORM and TP of RM24.20. Our TP is based on a GGM-derived PBV of 1.29x (COE: 9.9%, TG: 2.5%, ROE: 12.0%) based on a CY24F BVPS of RM19.41. 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 Dec 2023