INVESTMENT HIGHLIGHTS

• Earnings within expectations.

• Net profit growth was due to income growth and robust result of its associate.

• NIM improvement contributed to NII growth.

• NIM improvement was due to strong CASA deposits growth.

• Decent gross loans growth.

• Continued slight deterioration in asset quality.

• Well contained OPEX due to its digitization initiatives.

• No change to our forecasts.

• Maintain NEUTRAL as all positives have been priced in. Unchanged TP of RM15.70 based on 1.4x PB multiple.

Earnings within expectations. Hong Leong Bank Berhad 1QFY18 net profit was within ours and consensus' expectations. It was 26.7% and 26.9% of respective full year estimates.

Net profit growth due to income growth and associate. The +17.8%yoy earnings growth was due to the strong income growth of +7.5%yoy. Also, there were robust result coming from its associate, Bank of Chengdu, where it grew +65.6%yoy to RM147.8m.

NIM improvement led to NII growth. NII for 1QFY18 grew a solid +10.3%yoy due to NIM improvement of +12bps yoy. We believe that this was largely contributed by effective funding cost management. Interest expense (excluding Islamic Bank) fell -2.6%yoy to RM831.7m. This was not surprising as CASA grew +11.5%yoy to RM41.0b while fixed deposit fell -1.7%yoy to RM85.2m.

Decent loans growth. Gross loans grew +7.6%yoy to RM124.9b underpinned by expansion in the residential properties and SME segment. Both of these gross loans segment grew +9.9%yoy to RM58.0b and +6.5%yoy to RM20.6b respectively. This compensated the the -5.7%yoy and -4.0%yoy decline to RM17.3b and RM5.6b in transport vehicle and unsecured loans respectively.

Another uptick in GIL ratio. There seems to be a continued slight deterioration of asset. GIL ratio stood at 0.98% as at 1QFY18, which is +2bps qoq higher. Management indicated that there is no major stress on portfolios. We saw the uptick in GIL ratio was in the residential properties and transport vehicles (+4bps qoq to 0.58% and +7bps qoq respectively). Although, at current juncture asset quality remain sound, we would have to monitor the situation more closely. Nevertheless, there was adequate coverage with LLC at 96%.

Digitization having positive impact, tight OPEX. CI ratio improved -1.8ppt yoy and -1.7ppt qoq to 43.0%. Besides the strong growth in income, we note that OPEX was well contained. Personnel cost and marketing cost was relatively flat, yet there were income growth. The only expense growth was from establishment cost and this was due to investment in IT. It seems that HLB's digitalisation initiative is bearing fruit. For example, financial transaction volume went up +55%. We believe that this will be the driver for HLB's earnings growth in FY18 and FY19.

FORECAST

We make no change to our forecasts as the result came within expectations.

VALUATION AND RECOMMENDATION

Operation-wise, we continue to like the Group especially its NIM led NII strong growth. We believe that its digitization initiative will be a driver for its earnings growth. However, we believe that all the positives of the Group’s performance have been priced in. Therefore, we maintain our NEUTRAL recommendation. Our unchanged TP to RM15.70 is based on pegging its FY18 BVPS to a PB multiple of 1.4x which is 1 standard deviation below its 5-year historical average.

Source: MIDF Research - 4 Dec 2017