INVESTMENT HIGHLIGHTS

• Net profit for 9MFY18 was above expectations

• Hong Leong Bank Bhd remains a key driver

• HLB earnings driven by associate Bank of Chengdu

• Interim dividend of 27 sen

• Tweaking our FY18 and FY19 forecast upwards by +5.9 and +8.3% respectively

• Maintain NEUTRAL on HLFG with an adjusted TP of RM19.00 (from RM18.70) based on SOTP valuation

HLFG 9MFY18 exceeded expectations. HLFG reported 9MFY18 net profit of RM1.45b, which was above ours and consensus' expectations coming in at 81.8% and 81.6% of respective full year estimates. The variance was due to better than expected contribution from HLB's associate, Bank of Chengdu (BOC).

Strong results from BOC drove HLB earnings. Contribution from BOC to HLB's earnings grew +67.3%yoy to RM404.4m. Meanwhile, the consolidated share of results from BOC to the Group saw growth of +53.9%yoy to RM450m. This was due to the robust operating income and improving asset quality

Besides that, Islamic banking was particularly strong as well, with income expanding +18.7%yoy to RM483.3m.

Meanwhile, HLB's OPEX grew +3.9%yoy with personnel cost being contained, remaining flat at RM835.5m. Main cost item continue to be IT expenses where it rose +11.3%yoy to RM122.7m as the Group continue to investment in digitisation.

However, HLB's gross loans growth continues to be much lower than expected with +1.6%yoy to RM125.4b. Mortgages and SME loans remains robust but auto loans continued its downtrend. In addition, there were also corporate repayments in the quarter.

Deposits for HLB was also equally disappointing as it grew by only +1.3%yoy to RM154.2b as at 9MFY18. Business enterprise was flat. However, we were pleased to see solid CASA expansion.

HLB's asset quality continues to be sound, with overall GIL ratio improving by +4bps yoy to 0.84% as at 3QFY18.

Source: MIDF Research - 31 May 2018