HL  Bank’s  3QFY14  results  were  in  line  with  our  and  consensus estimates.  Positive  underlying  trends  include  stable  NIMs,  well controlled overheads, sound asset quality and robust contribution from BoC  but loan growth remains tepid while non-interest income softened during  the  quarter.  Valuations,  in  our  view,  appear  attractive  and  we reiterate BUY with GGM-derived FV of MYR16.40 (vs MYR16.60).

• Results in line. Hong Leong Bank (HL Bank) reported 3QFY14 net profit of  MYR500m  (+10%  y-o-y;  -4%  q-o-q), in line  with our and  consensus expectations,  with  9MFY14  net  profit  of  MYR1.56bn  (+9%  y-o-y) accounting for 76% of our and consensus full-year estimates.
• Results  highlights.  Positives  were:  i)  mild  3bps  q-o-q  net  interest margin (NIM)  expansion  (-4bps  y-o-y). NIM has been holding steady at around the 2% mark for the past four quarters,  ii) overheads remained tightly controlled, down 10-11% y-o-y and q-o-q, iii) robust  growth  from associate,  Bank  of  Chengdu  (BoC),  up  70%  y-o-y  (+26%  q-o-q).  We suspect BoC  may have  benefited from the rise in interbank rates given its low loan-to-deposit (LD) ratio of 57% at end-2013, and  iv) solid asset quality with absolute gross impaired loans declining by 5-6% y-o-y and q o-q.  Thus,  credit  cost  remained  low  at  10bps  (annualised)  while  HL Bank’s  gross impaired loan ratio of 1.24%  remains among the  lowest  in the industry. On the flip side,  annualised loan growth of 6%  was below the  10% target and our assumption.  We believe growth may have been impacted by some lumpy corporate repayments during the quarter. We are  also  slightly  disappointed  with  the  lack  of  traction  in  the  hire purchase  segment.  Apart  from  that,  non-interest  income  was  weak (-40% y-o-y; -44% q-o-q) with the drop largely broad-base.
• Deposit  growth.  Total  customer  and  current  account  and  savings account (CASA) deposits  rose 1% sequentially and hence, the LD and CASA ratios were unchanged q-o-q at 78.4% and 26% respectively.
• Capital.  We estimate group and bank  fully-loaded  common equity tier 1 (CET-1)  ratios  were  8.2%  (-50bps  q-o-q)  and  7.2%  (+30bps  q-o-q) respectively, as at end-Mar 2014.
• Forecast and investment case.  No changes to our earnings forecasts We lower our FV by 1% to MYR16.40  following a switch in our valuation methodology  to  the  Gordon  Growth  Model  (GGM)  (the  previous  P/E derived MYR16.60 FV was based on CY14 P/E of 13.5x). Maintain Buy.

Source: RHB