INVESTMENT HIGHLIGHTS

• Net profit within expectations.

• Earnings growth led by income growth.

• Margin compression in 4QFY18.

• Loans growth was decent supported by mortgages.

• Deposits growth disappointing but good CASA momentum.

• Dividend of 32 sen bringing full year dividend to 48 sen.

• No revision to FY19 forecasts.

• Maintain NEUTRAL with unchanged TP of RM18.85, pegging its FY19 BVPS to 1.5x, which is its 5-year historical average.

Net profit within expectations. Hong Leong Bank Berhad (HLB) posted FY18 net profit growth that was within ours and consensus' expectations coming in at 101.4% and 102.2% of respective estimates. The strong growth of +23.0%yoy was due to solid income growth and absence of tax impact which affected FY17 that amounted to RM102m. Excluding this tax impact, earnings grew +17.4%yoy.

Income led by NOII and Islamic Banking. NOII grew +12.4%yoy supported by growth in trading & investment income of +46.0%yoy to RM623m. This included gains from sale of Visa shares, which we believe was one-off. For NII, it was led by Islamic Banking which expanded +17.4%yoy to RM646.0m. Meanwhile, conventional NII grew +1.4%yoy to RM2.89b due to contraction in 4QFY18 of -5.3%yoy to RM690.4m.

Margin compression in 4QFY18. The fall in NII in 4QFY18 was the result of margin compression. NIM fell by -7bps qoq and -11bps yoy to 2.03% due to deposits re-priced higher following OPR hike earlier this year. However, FY18 NIM improved +1bps yoy to 2.1%. The management expects NIM to remain above 2% in FY19.

Lowest CI in 6 years. HLB seems to be reaping the benefit of its digitization program as CI came in at 42.6%, the lowest in the past 6 years. OPEX grew by +2.6%yoy with the major contributor being IT investments which grew +11.2%yoy to RM164.3m. Of this, digitization related cost amounted to RM97m. Personnel cost fell marginally by - 0.5%yoy to RM1.11b on lower headcount.

Loans growth within target. Gross loans grew +3.1%yoy to RM129.1b. The main driver was residential properties loans which grew +7.9%yoy to RM61.4b. SME loans was almost flat at +0.5%yoy to RM20.5b but we understand that Group SME segment saw good traction. The gross loans growth was moderated by decline in auto loans and unsecured loans which fell -8.8%yoy to RM16.9b and -4.0%yoy to RM5.6b respectively.

Source: MIDF Research - 29 Aug 2018