HLBANK’s diversified books enables it to leverage on the broad scale economic recovery with GIL ratios (better than pre-pandemic levels) leaving the group less exposed to singular industry risks. NOII may decline but this is offset by the much lower credit cost expectations. BUY with a TP of RM22.70 premised on an unchanged CY23E PBV of 1.34x (within its 5-year mean). We believe HLBANK is suitable for defensive-oriented investors.

During the recent 1HFY22 results briefing, management raised their loans growth guidance to 6-7% (from 5-6%; YTD: 6.7%). The group remains a beneficiary of SMEs picking up pace in a rejuvenated economy whilst households continue to take advantage of the low interest rate environment. For now, supply-chain disruptions stemming from the Russia-Ukraine conflict is unlikely to impact the quality of the group’s assets.

With regards to writebacks, HLBANK is in tune with BNM’s preference of withholding reversal of provisions until the medium term (3-6 months) health of its books can be firmly established. At present, HLBANK has RM873m provisioning buffers in place which are likely reserved for the most part of FY22. Meanwhile, the group’s repayment assistance pool continues narrowing as troubled accounts graduate from the program. The balance as of Mar 2022 stands at RM7.6bn, less than 5% of total financing (Feb 2022: RM10bn).

Banks are seen aggressively competing to acquire cheap deposits ahead of expectations for at least one OPR hike in 2HCY22. The group navigates this with targeted term deposit products to sustain interest costs for the medium term. CASA strategy (FY22 target: >30% mix) of mainly tapping on digital propositions with collaboration with e commerce platforms is proving to be a sticky means of capturing and retaining customers. To recap, every 25 bps OPR increase is expected to translate to a 3-4 bps rise in annualised NIM. Meanwhile, 18%- owned associate, Bank of Chengdu (BOCD) could continue to contribute nicely to bottom-line. At present, there may be some concerns as to the impact of restrictive lockdowns in China. However, we opine that even if this was to affect the bank, its c.20% earnings growth expectations should still cascade to HLBANK considerably after taking on a few hits.

Source: Rakuten Research - 5 Apr 2022