INVESTMENT HIGHLIGHTS

• Earnings within expectations

• PPOP continue to be under pressure

• Funding cost pressure led to lower NIM

• Robust loans growth

• Tight control on asset quality

• Interim dividend 34sen, full year dividend 50sen

• Maintain NEUTRAL with revised TP of RM17.00 (from RM20.30)

Earnings in line. Hong Leong Bank Berhad (HLB) FY19 net profit grew +1.0%yoy. This was in line with expectations coming in at 95.9% and 96.8% of ours and consensus' estimates respectively. The earnings growth was fully supported by write backs and lower tax. There were a net write back of RM58.1m in 2QFY19, while tax were -14.2%yoy lower due to a tax incentive.

PPOP remained under pressure. PPOP declined -5.2%yoy even as OPEX was well contained. This was due to lower income which fell - 2.4%yoy. NII declined -2.9%yoy as the result of lowered NIM from higher cost of funding. Interest expense grew +14.1%yoy to RM4.8b with NIM falling -14bp yoy to 1.96%. The OPR cut in May'19 further exacerbated the matter as NIM in 4QFY19 fell -11bp qoq. Meanwhile, NOII was relatively flat, contracting -0.7%yoy due to sharp decrease of -36.4%yoy to RM396m in trading & investment income.

Gross loans growth momentum moderated NIM impact. Gross loans ended the year on a strong note. It grew +6.6%yoy to RM137.6b supported by expansion in most of its segments. Residential mortgages and hire purchase loans grew +9.9%yoy to RM67.4b and +3.5%yoy to RM17.5b respectively. While unsecured loans contracted -2.2%yoy to RM7.0b, the management indicated that its credit card tie-up with GSC, AirAsia and Emirates is expected to reverse this trend. SME loans also robust growth of +6.7%yoy to RM21.5b.

Slowdown in deposits could arrest NIM decline. Deposits grew at slower pace as at 4QFY19. It expanded +3.6%yoy to RM163.1b as compared to +5.7%yoy to RM163.0b as at 3QFY19. FD grew 3.2%yoy to RM91.1b while CASA grew +1.3%yoy to RM41.7b. As a result LDR increased slightly to 84.4% from 82% last year. We believe that this is positive as the HLB has ample liquidity and do not need to fight for deposits. This should mitigate some of the pressure to NIM.

Asset quality strong and stable. HLB’s GIL ratio improved -9bp yoy to 0.78%. This was its lowest GIL ratio ever. We opine this is one of the key strength of HLB.

Met most of FY19 targets, incremental step up for FY20. The management met most of its FY19 targets except for NIM which came in below 2% and CI ratio which was above 43% at 44.3%. For FY20, the management guided the following targets; (1) gross loans growth 5-6%, (2) NIM circa 2%, (3) NOII ratio of above 28%, (4) CI of between 43-43.5%, (5) GIL of below 1% and (7) ROE of between 10.5-11%. We believe that HLB may have difficulties with the NIM target given the compression pressure.

FORECAST

We maintaining our FY20 and introduce our FY21 forecast.

VALUATION AND RECOMMENDATION

As we mentioned previously, we were disappointed that HLB’s earnings growth did not come from PPOP expansion. An area we commend upon is the strong gross loans growth but this did not translate into NII growth. Also, we noted that NOII did not provide much support recently. In addition, we are more cautious of FY20 prospect given the uncertain external environment. With no boost to earnings in the short term, we maintain our NEUTRAL call for the stock with a revised TP of RM17.00 (from RM20.30) as we peg its FY20 BVPS to a lower PBV of 1.3x (from 1.5x) to reflect the heighten risk stemming from external uncertainties.

Source: MIDF Research - 29 Aug 2019