What’s New

• HLB’s 2Q/1HFY17 earnings was in-line; lifted by higher NIM and treasury income
• Higher provisions at Bank of Chengdu dragged contribution from associate but the asset-quality situation there is now contained
• HLB remains on track to meet FY17 targets
• Maintain BUY with unchanged RM15.00 TP

Growing from strength to strength

Backed by solid fundamentals; BUY. Hong Leong Bank’s (HLB) banking franchise remains undervalued in our view. We believe the market is not attributing sufficient premium to its key attributes of solid asset-quality indicators and strong liquidity position. In this current uncertain environment, balancing liquidity versus profitability will be crucial. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate, remains a wildcard.

Strong NIM and non-interest income lifted earnings in 2Q/1HFY17. HLB reported another solid set of results, underpinned by strong NIM and treasury income, but slightly mitigated by weaker contribution from its associate, Bank of Chengdu (BOCD). BOCD was hit by higher year-end provisions (BOCD’s financial year end is in December), but we understand the asset-quality situation has stabilised. Net interest income was boosted by decent loan growth (5% y-o-y) and higher NIM (from loan repricing and funding cost management). There was a very slight uptick in impaired loans ratio to 0.86% from 0.84% q-o-q, while coverage ratio stayed above 100%. HLB declared an interim DPS of 15 sen during the quarter.

On track to meet FY17 targets. Apart from a slightly more optimistic guidance on NIM and credit cost, FY17 targets were largely retained – loan growth to track industry levels of 4-5%, non-interest income ratio of <25%, cost-to-income ratio of <46% and ROE of 10-11%. NIM guidance was revised upwards from >1.9% to >2%, as less pressure is felt on its funding cost compared to a year ago and its ability to reprice loans higher. The range of its credit cost guidance was also narrowed from 25-35bps to 25-30bps. As of end-1HFY17, HLB is on track to meet all its FY17 targets.

Valuation:

HLB is a BUY, with a target price of RM15.00. Our TP is derived using the Gordon Growth Model and assumes 11% ROE, 9% cost of equity and 4% long-term growth rate; it implies 1.4x CY17 BV.

Key Risks to Our View:

Slower-than-expected materialisation of growth plans. HLB’s inability to deliver growth plans for wealth management and inability to sustain current NIM trends could limit earnings growth.

Source: Alliance Research - 22 Feb 2017