INVESTMENT HIGHLIGHTS

• Net profit for 1HFY18 came within expectations

• NII grew robustly while NOII was a drag. Cost well contained

• NII growth from NIM improved on better COF. CASA grew solidly

• Loans growth was disappointing and was lifted by mortgages

• Slight deterioration in asset quality

• Interim dividend of 16 sen

• No change to our FY18 but tweaked +3.3% upward FY19 forecasts

• Maintain NEUTRAL with adjusted TP of RM18.55 (from RM15.72), as we revert to pegging its FY19 BVPS to 1.5x, which is 5-year historical average.

Net profit for 1HFY18 within expectations. Hong Leong Bank Berhad 1HFY18 net profit came in within expectations at 54.7% and 54.6% of ours and consensus’ full year estimates respectively. The Group posted robust net profit growth of +21.0%yoy that was supported by strong NII growth, contained OPEX increase and recovery at its associate BOC.

NII momentum from improved NIM. NII (including Islamic Banking) in 1HFY18 grew +9.0%yoy, driven by +8bps yoy NIM improvement. The better NIM was due to disciplined asset & liability management. Interest expense fell -1.1%yoy to RM1.67b while interest income went up +2.3%yoy to RM3.16b.

Robust CASA growth. Meanwhile, CASA grew +9.3%yoy to RM41.3b which was a key driver in NIM improvement. This uplifted total deposit growth to +3.1%yoy to RM155.3b.

NOII was a drag. NOII fell -2.3%yoy to RM625m which stemmed from lower fee income. For 9MFY18, fee income fell -7.1%yoy to RM290.6m partly from -6.7%yoy to RM115.2m decline in credit card fees.

Cost was well contained. OPEX grew +3.2%yoy with personnel cost being contained, remaining flat at RM558.4m. IT expenses continued to be trend upwards with +22.4%yoy to RM40.1m as the Group continue to investment in digitalisation.

Disappointing loans growth. Gross loans growth came in much lower than expected with +1.8%yoy to RM125.5b as at 2QFY18. There was a pull back in working capital, unsecured and hire purchase loans. These loans segment fell -3.5%yoy to RM22.4b, -3.4%yoy to RM5.67b and -4.5%yoy to RM17.31b respectively. However, we understand that beside lower vehicle demand, the Group was also selective in regards to hire purchase loans. Conversely, mortgages grew strongly by +9.0%yoy to RM59.12b.

Slight deterioration in asset quality. While the Group's asset quality continues to be sound, there was a slight deterioration as overall GIL ratio increased by +11bps yoy to 0.97% as at 2QFY18. This came domestically and mostly from its residential properties and SME loans book. The GIL ratio for these segments as at 2QFY18 was 0.55% and 1.47% respectively as compared to the 0.46% and 1.32% as at 2QFY17 respectively. However, we noted that GIL was stabilised in the quarter.

Booster from contribution of associate, BOC. BOC’s contribution grew +111.7%yoy to RM273.1m. This had contributed 16.9% to the Group's profit before tax.

Revising loans growth target. The management are revising its loans growth target to 3-4%yoy for FY18 from 5- 6%yoy previously. We believe that this target seems more achievable given current run rate. However, we believe that this might affect income should NIM come under pressure. Nevertheless, we expect NIM to remain steady given the OPR hike recently.

FORECAST

As results came in within expectiations we make no change to our FY18 forecast but tweak FY19 earnings estimate by +3.3% to take into account the performance from BOC.

VALUATION AND RECOMMENDATION

We like the fact that NIM continued to improve. However, in our opinion, this had only moderated the effect from a disappointing loans growth. As such, we do not foresee any immediate catalyst that will provide a boost or any upside surprises to the Group earnings. We believe that the recent share price momentum was due to investors adjusting the valuation of the Group towards its historical average. Likewise, with no pressure to the Group earnings in the near term, we are adjusting our TP to RM18.55 (from RM15.72) as we pegged its FY19 BVPS to PBV of 1.5x (from 1.4x previously) which is its 5-year historical average PBV.

Source: MIDF Research - 27 Feb 2018