KEY INVESTMENT HIGHLIGHTS

• Decline in 3QFY20 net profit but results were within expectations

• Lower income dragged 3QFY20 earnings

• Higher provisions due to ECL buffers

• Strong loans growth despite challenging environment

• Uptick in GIL ratio, quarter-on-quarter basis

• No change to FY20/FY21/FY22 earnings forecast

• Maintain NEUTRAL with unchanged TP of RM13.60

Within expectations. Hong Leong Bank (HLB) reported lower earnings in 3QFY20. This resulted in marginal decline of -0.7%yoy in its 9MFY20 net profit. However, this was within ours and consensus expectation coming in at 74.5% and 75.8% of respective full year estimates.

Lower performance in 3QFY20 dragged net profit. PPOP in 9MFY20 grew +4.9%yoy due to performance in 1HFY20 as 3QFY20 PPOP fell -7.2%yoy. NII in 3QFY20 came in lower by -2.1%yoy due to NIM compression of -16bp yoy following from the OPR cuts in the quarter. However, strong loans growth moderated this impact.

NOII growth from trading income. NOII in 9MFY20 grew +6.2%yoy. This was driven by trading & investment income expansion of +29.0%yoy to RM334m.

Higher provisions due to ECL buffers. Provisions increased in 3QFY20 with credit cost going up +34bp yoy. This was due to ECL buffers of RM65m set aside to take into account the effect of Covid-19 pandemic and the movement control order (MCO). We expect to see the full impact in 4QFY20. Management expects credit cost to rise within the next 6 month between 10-13bp and on a stress scenario, 25bp.

Strong loans growth despite the challenging environment. Gross loans expanded +6.6%yoy to RM142.4b as at 3QFY20. Major drivers were residential properties, domestic business enterprise and surprisingly in Singapore. These grew +8.9%yoy to RM71.8b, +4.6%yoy to RM40.5b and +14.2%yoy to RM5.6b respectively. In terms of business enterprise segment, the key contributors were SME and community SME banking as it expanded +1.7%yoy to RM21.2b and +33.5%yoy to RM7.1b respectively.

Uptick in GIL ratio. HLB’s GIL ratio saw another uptick on a sequential quarter basis. GIL ratio went up +14bp qoq to 0.98%. However, we consider this to be still very manageable and the management expect it to normalize in 4QFY20.

Good pickup in CASA. Deposits grew +3.0%yoy to RM167.9b. CASA saw good growth with +11.8%yoy to RM44.3b outpacing FD growth of +3.9%yoy to RM95.6b. This could be due to depositors ensuring sufficient cashflows.

No revision in earnings forecast. As the results were within our expectations, we are maintaining our FY20/FY21/FY22 earnings forecast.

Source: MIDF Research - 1 Jun 2020