INVESTMENT HIGHLIGHTS

• Net profit for 9MFY18 above expectations. Variance due to our underestimation of BOC results

• Strong results from Islamic Banking and NOII

• Loans growth was disappointing but was lifted by mortgages

• Deposits growth was equally disappointing

• Improved asset quality

• Revising upwards our FY18 and FY19 forecasts

• Maintain NEUTRAL with adjusted TP of RM18.85 (from RM18.55), its FY19 BVPS to 1.5x, which is 5-year historical average

Above expectations. Hong Leong Bank Berhad (HLB) registered 9MFY18 net profit growth of +21.1%yoy to RM2.01b. This had exceeded our expectations coming in at 83.7% of our full year forecast as we had underestimated the contribution from BOC. Meanwhile, HLB result came in at the upper bound of consensus' expectations at 79.2%.

Strong showing in associate, Islamic banking and NOII. Result from BOC came in +67.3%yoy higher to RM404.4m which was due to the robust operating income and improving asset quality. Besides that, Islamic banking was particularly strong as well, with income (both NII and NOII) expanding +18.7%yoy to RM483.3m. This had lifted overall NII to grow +6.3%yoy as compared to +3.6%yoy growth to RM2.20b for conventional NII alone. In addition, overall NOII grew +11.7%yoy due to higher trading & investment income (+39.8%yoy to RM453m) where there were disposal of some equity investments.

Cost remains well contained. 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.

Sluggish loans growth. Gross loans growth continues to be much lower than expected with +1.6%yoy to RM125.4b. Mortgages and SME loans remains robust with +8.2%yoy to RM60.2b and +2.9%yoy to RM20.6b respectively. However, auto loans continued its downtrend, falling -5.1%yoy to RM17.0b. Besides, there were also corporate repayments in the quarter.

Expectations of lower bound of loans growth target. Recall, the management had revised its loans growth target to 3-4%yoy for FY18 from 5-6%yoy previously. With the current run rate, the management are now expecting that loans growth may come in at the lower bound of its estimate. At current juncture, we believe that this target seems ambitious. However, the management have indicated that current loans pipeline suggest that this target to be achievable.

Similarly disappointing for deposits growth. Deposits grew by only +1.3%yoy to RM154.2b as at 9MFY18. Business enterprise was flat at RM60.9b. However, we were pleased to see solid CASA expansion at +5.9%yoy to RM41.1b. This had been one of the key reason for the improvement in NIM by +4bps yoy to 2.12% in 9MFY18.

Improved asset quality. The Group's asset quality continues to be sound, with overall GIL ratio improving by +4bps yoy to 0.84% as at 3QFY18. On a YTD basis, GIL ratio improved in Malaysia by -14bps to 0.87% which saw better asset quality for mortgages. The GIL ratio for mortgages fell -3bps to 0.51%.

FORECAST

We are revising our FY18 and FY19 forecast upwards by +8.2% and +11.0% respectively as we take into account the performance of its associate, BOC.

VALUATION AND RECOMMENDATION

HLB continues to exhibit strong set of results especially with the contribution of BOC causing a pleasant surprise to us. Nevertheless, the strong results were tempered by the disappointing growth in terms of loans and deposits. This had led us to believe that there may be some delicateness to earnings momentum should there be any headwinds faced by BOC. As such, we maintain our NEUTRAL call for the stock. We are adjusting our TP to RM18.85 (from RM18.55) due to our revision of FY19 earnings affecting its BVPS. We pegged its FY19 BVPS to PBV of 1.5x which is its 5-year historical average PBV.

Source: MIDF Research - 31 May 2018