KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• PPOP was robust supported by NII growth

• Loans growth was strong and asset quality stable

• Deposits lagged loans growth but CASA was key driver

• No change to FY19 and FY20 earnings forecast

• Maintain NEUTRAL with revised TP of RM17.70 (from RM17.00) as we rollover valuation to FY21

Within expectations. Hong Leong Bank (HLB) reported 1QFY20 net profit decline of -2.6%yoy. However, it was within ours and consensus' expectations at 23.5% and 25.3% of respective full year estimates. Excluding the one-off gains of RM72m last year, the normalised earnings grew +8.3%yoy.

Robust PPOP. On normalised basis, PPOP grew +8.6%yoy due to by NII expansion of +7.7%yoy and the -1.5%yoy lower OPEX. NII was supported by strong loans growth and a recovery in NIM. Its NIM was +14bp qoq and +5bp yoy better as higher cost fixed deposits got repriced lower post the OPR cut in May'19. Most of the NII increase came from Islamic banking as Islamic banking income rose +16.8%yoy to RM199.8m while conventional NII grew only +0.9%yoy to RM704.3m.

Increase in underlying NOII. NOII excluding the one-off gain grew +2.8%yoy. Most of the expansion were contributed by the +20.3%yoy rise in fee income, to RM166m. Fee income was supported by pick up in wealth management income where it grew +17.2%yoy to RM32m.

Strong loans growth. Gross loans expanded +6.8%yoy to RM138.7b as at 1QFY20. Major drivers were residential properties and domestic business enterprise. These grew +10.2%yoy to RM69.0b and +9.9%yoy to RM39.9b respectively. In terms of business enterprise segment, the key contributors were SME and community SME banking as it expanded +8.9%yoy to RM21.8b and +37.2%yoy to RM6.2b respectively.

Asset quality stable. Asset quality remained stable with GIL ratio at 0.81%. It was only a slight uptick from 4QFY19 level coming from its domestic loans book. However, overall asset quality remains healthy.

Deposits lagging loans growth. Deposits grew +3.0%yoy to RM163.5b. However, we were pleased that this was mainly led by CASA which expanded +5.5%yoy to RM41.8b Meanwhile, fixed deposits increased +1.3%yoy to RM90.4b and fell -0.7%qoq. We believe that this had helped the NIM recovered in the quarter.

No change in earnings forecast. We are maintaining our earnings forecast for FY20 and FY21 as the result were within expectations.

Source: MIDF Research - 28 Nov 2019