INVESTMENT HIGHLIGHTS

• 9MFY17 earnings came within expectations.

• Net profit growth from robust NII and NOII growth.

• Remarkably NIM continues to improve contributing to NII growth.

• NOII growth came from trading and investment income.

• Gross loans and deposits momentum intact. Stronger CASA growth.

• Asset quality remains stable.

• Better contribution from BOC.

• No change to our forecasts.

• Maintain BUY with revised TP of RM15.70 (from RM15.50), as we peg its FY18 BVPS to 1.4x PB multiple, at 1 standard deviation below its 5-year historical average.

Net profit for 9MFY17 within expectations. Hong Leong Bank Berhad 9MFY17 net profit came within ours and consensus’ expectations at 72.4% and 76.3% of respective full year estimates. It posted a normalised net profit growth of +12.7%yoy to RM1.66b due to robust income growth.

Another quarter of NIM improvement. NII grew +8.3%yoy to RM2.49b, driven by another quarter of NIM improvement. This was the 4th consecutive quarter. NIM for 3QFY17 was +23bps yoy higher at 2.14%, while it was +14bps yoy higher at 2.08% for 9MFY17. The NIM improvement was due to continued prudent loan pricing and effective funding costs management.

NOII grew slightly slower in 3QFY17. NOII for 3QFY17 grew slightly slower at +9.4%yoy (vs. +18.2%yoy in 2QFY17). However, 9MFY17 NOII was still strong as it expanded +13.8%yoy.This was due to higher trading & investment income, which grew +117%yoy to RM324m. NOII ratio was better at 26.7% vs. 25.8% in 9MFY16.

Loans growth slightly below target. Gross loans as at 3QFY17 grew +3.9%yoy to RM123.4b, slightly below the 4-5% target set by management. Main contributor to the growth was mortgages and SME loans. This segment grew +11.2%yoy to RM55.7b and +7.5%yoy to RM20.1b respectively.

Ample liquidity to back loans growth. Deposits was +4.2%yoy higher to RM152.2b as retail franchise continue to grow, where individual deposits increased by +8.9%yoy to RM85.1b. More notably, CASA expanded +8.8%yoy to RM38.8b, which we believe contributed to the improvement in NIM. The CASA growth outpaced fixed deposit growth of +2.5%yoy to RM86.7b. As a result, CASA ratio improved by +0.4ppt qoq to 25.5%.

Solid asset quality. Overall GIL ratio stood at 0.88% as at 3QFY17, which was only an increase of 2bps qoq and lower than the industry’s GIL ratio of 1.61%. It appears that there were no major stress to asset quality with stable GIL ratio for residential properties, transport vehicles and SME at 0.5%, 0.77% and 1.5% respectively. In addition it is suitably covered with LLC at 106%, again higher than industry’s 90% level.

Back to normalize earnings for associate, BOC. BOC’s contribution grew stronger with +25.9%yoy to RM112.8m in 3QFY17. Management noted that BOC’s earnings were normalising after the year-end (which was reflected in the 2QFY17 result) provisioning done for higher risk accounts. As such, 9MFY17 contribution from BOC expanded +3.7%yoy to RM241.8m, as opposed to the -10.1%yoy fall to RM129.0m in 1HFY17.

FORECAST

As results came in within expectiations we make no change to our forecasts.

VALUATION AND RECOMMENDATION

We like the fact that there was another quarter of NIM improvement. We believe that the robust NIM will allow income growth to be maintained. We also opine that loans growth will pick up and believe that the Group has space to ramp-it up given that LDR is at a comfortable level. In addition, the Group has a very good asset quality as evident by the lower-than-industry GIL ratio. An added bonus was the normalisation of BOC’s earnings. Hence, we maintain our BUY call. We revise our TP to RM15.70 (from RM15.50) as we peg its FY18 BVPS to a PB multiple of 1.4x which is 1 standard deviation below its 5-year historical average.

Source: MIDF Research - 30 May 2017