INVESTMENT HIGHLIGHTS

• Earnings in line

• Strong NOII growth

• NIM compression continued in 1QFY19

• Mortgage supported loans growth

• No revision to FY19 forecasts

• Maintain NEUTRAL with adjusted TP of RM20.30 (from RM18.85) as we roll over our valuation to FY20

Earnings within expectations. Hong Leong Bank Berhad (HLB) posted 1QFY19 earnings that were in line with ours and consensus’ expectations. It came in at 25.4% and 25.5% of respective full year estimates. The robust +10.6%yoy earnings growth was supported by strong NOII expansion.

Strong NOII expansion due to divestment gains. NOII grew +35.4%yoy due to RM72m gains on divestment of joint venture, Sichuan Jincheng Consumer Finance Ltd. Co. Post completion of the divestment exercise, HLB retained interest of 12% and recognized the company as an associate. However, we understand that this divestment gain was one-off. Nevertheless, discounting this gain, NOII would still have a solid growth of +10.9%yoy to RM325m. This was supported by +9%yoy to RM52m growth in forex franchise.

Margin compression continued to affect NII. NII fell -3.8%yoy as NIM compression continued in 1QFY19. NIM fell -5bps qoq and -15bps yoy on the twin effect of deposit competition and deposit repricing following OPR earlier this year. However, management expect NIM to recover slightly as it had seen the price of ringgit denominated deposits stabilising, with pressure coming from USD denominated deposits.

Decent loans growth... Gross loans grew +4.0%yoy to RM129.8b. We believe that this had moderated the impact of NIM compression as NII rose +0.8%qoq. The gross loans growth was led by the +8.0%yoy to RM62.6b in residential mortgages. Meanwhile, business enterprise loans grew +3.5%yoy to RM36.3b. While HLB’s gross loans expanded lower than system loans growth, management expect that there will be a pick up later in FY19. We understand that businesses are currently cautious in drawing down approved loans.

…matched by deposits growth. Deposits expanded +4.0%yoy to RM158.8b. Bulk of the growth came from fixed deposits which grew +4.8%yoy to RM89.3b. Meanwhile, CASA shrank -3.2%yoy to RM39.7b. This could be the impact from the deposit competition.

Asset quality remains solid. GIL ratio improved -17bps yoy and -6bps qoq to 0.81%. The management does not expect pressure from any particular segment.

Most of FY19 targets on track. Recall, the management guided the following; (1) gross loans growth to be in line with industry, (2) LDR of circa 82%, (3) NIM of above 2%, (4) NOII ratio of above 27%, (5) CI of below 43%, (6) GIL of below 1% and (7) ROE of circa 11%. At the moment, HLB missed its gross loans and NIM target. However, it is still early days. We do not foresee any difficulties in the management achieving these targets except for NIM which we believe could still face some pressure.

FORECAST

We maintaining our FY19 and FY20 forecast.

VALUATION AND RECOMMENDATION

HLB had a strong start to its financial year. However, we opine that this was largely contributed by the divestment gain, and this was one-off in nature. Going forward, we believe that pressure of a NIM compression, and thus NII, will remain prevalent albeit not at a detrimental level. In addition, we expect its NOII growth will be able to moderate any impact from weakness in NII. As such, we maintain our NEUTRAL call for the stock with an adjusted TP of RM20.30 (from RM18.85) as we roll over our valuation to FY20. Our TP is based on pegging its FY20 BVPS to PBV of 1.5x which is its 5-year historical average PBV.

Source: MIDF Research - 29 Nov 2018