INVESTMENT HIGHLIGHTS

• Earnings within expectations

• Earnings growth supported by writebacks but PPOP pressure continued

• Lower NIM affected NII while lower trading & investment income dragged NOII

• Mortgage supported loans growth

• Maintain NEUTRAL with unchanged TP of RM20.30

Within expectations. Hong Leong Bank Berhad (HLB) net profit for 9MFY19 was within our and consensus' expectations. It was at 73.0% and 73.7% of respective full year estimate.

Net profit supported by write back. HLB’s 9MFY19 net profit was rather flat when compared against the previous year. It grew +0.8%yoy which was supported by write backs in provisions. Although, 3QFY19 saw a loan allowances and impairment of RM4.7m, there were a write back of RM39.4m in 1HFY18.

However, PPOP continue to be under pressure. PPOP fell further to -5.6%yoy in 9MFY19 (from -2.1%yoy in 1HFY19). Main contributor was the weakness in income with OPEX well contained, growing at +0.8%yoy.

Lower income from lower NII and NOII. Income fell -2.9%yoy dragged by both lower NII and NOII. HLB's NII fell -2.8%yoy due mainly to NIM compression of -14bp yoy. The NIM compression stemmed from deposits competition which led to higher COF. As such, this had offset the +7.7%yoy rise to RM6.2b in interest income, with interest expense growing +16.7%yoy to RM3.6b.

NOII dragged by lower trading & investment gains. For NOII, it fell -3.0%yoy. Mostly it came in 3QFY19 where NOII declined - 20.4%yoy. This was despite a RM90m gain for the divestment in a JV this year. The contraction was due to lower trading & investment gains which fell -42.8%yoy to RM259m.

Strong momentum in gross loans growth. Gross loans as at 3QFY19 trended higher, expanding +6.5%yoy to RM133.6b. Comparatively, it was +4.8%yoy and +4.0%yoy as at 2QFY19 and 1QFY19 respectively. It was driven by the +9.4%yoy to RM66b in residential mortgages and +8.1%yoy to RM20.9b in SME loans.

FD continued to lead deposits growth. Meanwhile, deposits grew +5.7%yoy to RM163.0b. It was not surprising that NIM came under pressure as the growth was led by FD. As at 3QFY19, FD grew +5.1%yoy to RM92.0b whereas CASA declined -3.6%yoy to RM39.6b.

Source: MIDF Research - 29 May 2019