KEY INVESTMENT HIGHLIGHTS

• Within our and consensus’ expectations

• Lower earnings dragged higher provisions from ECL buffers

• Operationally stable as income saw growth

• Strong loans growth despite challenging environment

• Asset quality stable as well

• Tweaking FY21/FY22 earnings forecast downwards

• Final dividend of 20sen, full year dividend of 36sen

• Maintain NEUTRAL with unchanged TP of RM13.60

Within expectations. Hong Leong Bank (HLB) reported -6.4%yoy decline in net profit for FY20. However, this was within ours and consensus expectation coming in at 96.5% and 98.9% of respective full year estimates.

Higher provisions dragged net profit lower. Provisions increased +>100%yoy, dragging net profit lower. This was due to additional credit loss buffers amounting to RM220m built, in order to withstand the expected loan impairments impacted by Covid-19. While this had affected FY20 earnings, it had allowed LLC to be solid at 142%. Nevertheless, we expect that credit cost will be elevated especially post loan moratorium.

Operationally stable. PPOP grew +1.6%yoy as income due to stable income. Total income grew +1.1%yoy. Main driver was NOII expansion of +10.4%yoy. This was contributed by treasury income which increased +122%yoy to RM364m and wealth management income growth of +10.6%yoy to RM120m.

NII surprisingly was flat. NII grew marginally +0.4%yoy. This was a pleasant surprise as we had expected NII to contract. However, this was due to NII growth in 1HFY20. NII in 4QFY20 declined -5.5%yoy and - 7.9%qoq as NIM contracted -27bp yoy and -22bp qoq.

Strong loans growth. Gross loans expanded +6.1%yoy to RM145.9b as at 4QFY20. Major drivers were residential properties and SME loans. These grew +8.7%yoy to RM73.3b and +5.3%yoy to RM22.6b respectively.

Uptick in GIL ratio. HLB’s GIL ratio improved as at 4QFY20 as it declined -37bp yoy and -17bp qoq. However, this could be due to the fact that it was still during the loan moratorium period. We expect that there will be an uptick post loan moratorium.

Good pickup in CASA. Deposits grew +6.4%yoy to RM173.5b. This was led by CASA whereby it grew +15.9%yoy to RM48.4b outpacing FD growth of +3.8%yoy to RM94.5b.

Downward revision in earnings forecast. We are tweaking our FY21/FY22 earnings forecast downwards by -5.4%/-6.2%. We are also introducing our FY23 earnings forecast.

Valuation and recommendation. As we had expected, we saw further weakness to HLB performance in 4QFY20. However, there were some performance that moderated the downside such as the strong loans growth and NOII. Also, asset quality seems stable and GIL ratio appears manageable at current juncture. The higher provisions were also to increase the coverage levels and this should allow for HLB to weather potential shock post loan moratorium. Taking everything into consideration, we are maintaining our NEUTRAL call for the stock with unchanged TP of RM13.60. Our TP is based on pegging its FY21 BVPS to 1.0x PBV.

Source: MIDF Research - 1 Sept 2020