INVESTMENT HIGHLIGHTS

• No surprises in 1HFY19 earnings

• PPOP pressure from higher OPEX and income weakness

• Lower NIM affected NII, NOII grew from one-off gains

• Mortgage supported loans growth

• Interim dividend of 16sen

• Maintain NEUTRAL with unchanged TP of RM20.30

No earnings surprise. Hong Leong Bank Berhad (HLB) posted 1HFY19 net profit that came within expectations. It was at 50.2% and 50.8% of our and consensus’ full year estimates respectively.

Net profit growth from write back. HLB’s net profit grew +5.5%yoy supported by write backs in provisions. There were a write back of RM39.4m on loans, advances and financing as opposed to an impairment of RM53.9m in 1HFY18. GIL ratio improved -17bps yoy to 0.8% as at 2QFY19. The improvement in asset quality came mostly in Malaysia as the GIL ratio went down by -19bps yoy to 0.82%.

However, PPOP under pressure. PPOP fell -2.1%yoy on higher OPEX and marginal decline in income. However in fairness, OPEX was well contained, raising +1.3%yoy mostly contributed by IT spending of +6.2%yoy to RM85.0m. We opine, the pressure stemmed from the weakness in income.

NIM compression affected NII. For 1HFY19, NII contracted - 3.7%yoy as pressure on NIM continued in 2QFY19. While on a sequential quarter basis the 2QFY19 NIM was stable at 1.98%, there was a compression of -15bps yoy when compared against 2QFY18. This resulted in NIM compression of -15bps yoy for 1HFY19. The lower NIM was due to deposits competition which led to higher COF.

Deposits growth led by FD. With the NIM compression, we are not surprised that deposits growth of +4.7%yoy to RM162.6b was led by FD expansion of +3.5%yoy to RM92.6b. CASA declined -2.4%yoy to RM40.3b due to withdrawal of some corporate accounts.

NOII moderated NII weakness, but from one-off gains. NOII grew +8.0%yoy moderated the NII contraction. However, we noted that the growth in NOII was due to a one-off RM90m gains that come from a divestment in a JV. To put into context, 2QFY19 NOII fell -16.3%yoy.

Acceleration in gross loans. Gross loans as at 2QFY19 grew at a faster pace, with +4.8%yoy to RM131.6b vs. +4.0%yoy posted as at 1QFY19. It was led by the +8.8%yoy to RM64b in residential mortgages. Meanwhile, SME loans grew +6.8%yoy to RM21.0b.

Source: MIDF Research - 27 Feb 2019