HLBK’s 1QFY14 results were 6% above our and 8% above consensus estimates,  when  annualised.  Net  profit  was  boosted  by  writebacks, which may not be sustainable  going forward. Nevertheless, the results were still decent,  with positive underlying trends such as stable NIMs, well-controlled overheads, sound asset quality and robust contribution from  BoC.  Reiterate  BUY,  with  FV  at  MYR16.60  (CY14  P/E  of  13.5x). maintained.

• Results in line.  Hong Leong Bank  (HLBK)  reported  a 1QFY14  net profit of MYR544m (+14% y-o-y; +31% q-o-q), ie 6% above our and 8% above consensus estimates, when annualised.  Nevertheless, we consider the results  to  be  in  line  as  net  profit  was  boosted  by  net  writebacks  of MYR15m  in  impairment  losses  and  MYR18m  in  loan  impairment allowances, both of which may not be sustainable going forward.
• Results  highlights.  Positives were: i)  stable  net interest margin  (NIM)(flat  y-o-y;  +2bps  q-o-q),  ii)  overheads  remain  tightly  controlled.  Thus, 1QFY14  cost-to-income ratio (CIR)  was stable y-o-y at 44.2% (4QFY13: 50.7%), iii)  a  net loan impairment writeback  for 1Q,  mainly due to a low individual  allowance  charge  and  continued  recoveries,  iv)  robust contribution from  20%-owned  associate  Bank of Chengdu  (BoC), which HLBK  said  was  operational  in  nature,  and  iv)  asset  quality  improved further, as absolute gross impaired loans dipped by 2% q-o-q. On the flip side, the 7% y-o-y loan growth was below system growth of 9.5%.
• Loan and deposit growth.  HLBK’s annualised  loan growth  was at 5%, below its  10% target and our assumption. Growth was led by residential mortgages and  small and medium enterprise loans,  but working capital (mainly trade-related loans) and auto  loans  were muted. That said, the auto loan book should start to see traction from 2QFY14  onwards,  while trade  financing  should  improve  in  2H,  according  to  management. Meanwhile,  the focus on growing current account and savings account (CASA)  deposits  was  evident,  as  CASA  increased  by  12%  vs  its  total deposit growth of  6%  (figures  annualised).  The CASA ratio reached  a new high of 26.3% (4QFY13: 25.9%).
• Asset quality.  The gross impaired loan ratio improved by  4bps q-o-q to 1.36% while loan loss coverage (LLC) was at 130% vs the system gross impaired loan ratio and LLC of 2% and 97.6% respectively.
• Forecasts  and investment case.  We  maintain  our  earnings  forecasts and MYR16.60 FV (CY14 P/E of 13.5x).  The strong 1Q results will help build a solid base for FY14F earnings. We  believe  street estimates  are too low. Asset quality  remains sound while valuations appear  attractive, in our view. Maintain BUY.

Company Profile
The group is involved in the  provision of conventional and Islamic banking services. The group’s operations span across Malaysia, Singapore, Hong Kong, Vietnam and China, via its strategic shareholding in Bank of Chengdu.

Source: RHB