KEY INVESTMENT HIGHLIGHTS

• Within our and consensus’ expectations
• Net profit improved as NII came in higher
• Provisions remains elevated but this was due to decision to build up loan impairment buffer.
• Gross loans growth traction maintained while deposits growth moving in tandem, led by CASA
• No change to earnings forecast
• Upgrade to BUY with revised TP of RM19.70

Within expectations. Hong Leong Bank (HLB) reported 1QFY21 earnings growth of +5.9%yoy. This was within ours and consensus expectation coming in at 28.5% and 28.9% of respective full year estimates.

Net profit supported by PPOP growth. The main drivers for the earnings growth were higher net income and lower OPEX. Net income grew +11.0%yoy as NII rebounded strongly to increase by +12.5%yoy. The strong expansion in NII was due to recovery in NIM as it expanded +38bps qoq to 2.0% on lower funding cost following repricing of fixed deposits (FD) after the OPR cuts. Meanwhile, NOII provided support with its +7.0%yoy growth due to solid treasury performance where it grew +47.2%yoy to RM184m. Meanwhile, OPEX was lower by -0.2%yoy due to lower marketing and admin & general cost. The combination of higher income and lower OPEX led to PPOP growth of +10.5%yoy.

Provisions elevated but building up buffers. The strong PPOP growth was moderated by higher provisions which came in at RM105m. However, we are not concern by the elevated provisions as it was to build strong buffers in light of possible deterioration in asset quality following from resurgence in the Covid-19 new cases in Malaysia. We note that preemptive impairment buffers amounted to RM238m, bringing LLC excluding regulatory reserve to 190%.

Asset quality improved. HLB’s GIL ratio improved -33bps to 0.48%. We recognize that this was still during the loan moratorium period. However, we do not expect a significant spike in the GIL ratio post loan moratorium period. Besides, HLB have built up strong buffers.

Gross loans growth traction maintained. Gross loans grew +6.8%yoy to RM148.1b (vs. +6.1%yoy to RM145.9b as at 4QFY20). Main contributors were mortgages which expanded +8.0%yoy to RM74.5b and domestic business enterprises which rose +8.4%yoy to RM43.3b. Of this, SME loans and community SME banking grew +9.4%yoy and +37.9%yoy to RM23.8b and RM8.5b respectively. We are not overly concern by the growth in SME loans given that these are partly guaranteed by Credit Guarantee Corporation (CGC) as part of the Government’s stimulus programme.

CASA led deposits growth. The sturdy gross loans growth was matched by robust deposits growth as it grew +6.8%yoy to RM174.7b (vs. +6.4%yoy to RM173.5b as at 4QFY20). This was led by CASA whereby it grew +21.0%yoy to RM50.6b outpacing FD growth of +6.8%yoy to RM96.6b. We believe that this will ensure NIM around current level.

Post loan moratorium period looking stable so far. HLB’s Payment Relief Assistance Plans (PRAP) amounted to RM11.8b or 8.0% of total gross loans base as at 16 November 2020. Of this, 78% or RM9.2b is from retail customers while SME and non-SME amounts to RM1.9b and RM0.7b respectively. We do not expect that all of its borrowers under the PRAP will turn non-performing. However, we recognize that with the Conditional Movement Control Order (CMCO) re-imposed that some of these borrowers (especially from businesses) may face further pressure. Nevertheless, with the build-up of buffers, we expect HLB to able to weather any stress to its asset quality.

No change to earnings forecast. We maintaining our earnings forecast given that the result was within our expectation.

Valuation and recommendation. We opine that HLB performance has improved. We are especially pleased to see net income growth and improvement in NIM. Meanwhile, we are not concern by the elevated provisions as this is due to the management wanting to be extra prudent in light of the uncertain current situation. We expect that HLB’s performance will continue to improve in the coming quarters in tandem with the expectation of an improved GDP for CY21. Taking everything into consideration, we are upgrading our call to BUY (from NEUTRAL). We are also revising our TP to RM19.70 (from RM13.60) as we rollover our valuation to FY22, and pegging its BVPS to higher PBV of 1.5x (from 1.0x). We opine that an upward revaluation of its PBV is justified given the expectation of better GDP growth next year and the positive development of the Covid-19 vaccine.

Source: MIDF Research - 30 Nov 2020