We retain our Neutral call on HL Bank with a revised TP of MYR12.00 (8% downside). Generally, HL Bank ticks the right boxes as a banking group that would be able to weather a downturn in the asset quality cycle. That said, while we do not expect any significant spikes in credit costs, bottomline growth could be a struggle in the absence of some ‘one-off’ earnings boosters last year as well as China’s slowing growth.

Well positioned to weather asset quality cycle, but bottomline growth still a struggle. Generally, HL Bank fits our preferred profile to weather the asset quality cycle ahead, ie: 1) retail-based loan book; 2) sound asset quality (gross impaired loan ratio of 0.84%) and 3) high loan provision buffers with the loan loss covera ge at 136%. That said, we think the group may struggle for bottomline growth ahead. FY15 net profit rose 6% YoY, aided by ‘one-offs’ such as gains from disposal of property (MYR45m) and revisions to its depreciation policy (depreciation and amortization charges fell 32% YoY). The group also enjoyed a loan impairment writeback of MYR52m in FY15 as recoveries stayed healthy, which we do not think is sustainable. Finally, we expect contribution from its associate, Bank of Chengdu, to soften ahead given the tou gher macro environment in China.

Forecasts. We toned down our FY16-18F operating income forecasts by up to 3% as we think markets-related income may not recover meaningfully anytime soon given the softer macro conditions. We also raised our FY16F/FY17F/FY18F credit cost assumptions to 17bps/19bps/19bps from 11bps/13bps/16bps respectively to factor in weaker recoveries and potential asset quality issues. Overall, we reduced our FY16F/FY17F/FY18F net profit projections by 3%/5%/5%.

Investment case. We trim our GGM-derived TP to MYR12.00 from MYR14.00, reflecting: 1) earnings revisions above; 2) roll-forward in valuations to CY16; and 3) impact of the upcoming rights issue, albeit on a proforma basis. Our GGM assumes: i) cost of equity of 10% (10.5%previously due to capital raising risk), ii) ROE of 10.5% (from 13%), and iii) long-term growth of 4.5%. Our TP is based on a fair 2016F P/BV of 1.1x, which is at a discount to its 10-year average P/BV of 1.9x. This is to reflect the lower ROEs (FY16-18F: 10.1-11.5%, post rights) that we project HL Bank to achieve going forward, relative to its average 10-year ROE of 15.4%. While asset quality and cost efficiency are plus points, we believe the group may struggle to achieve bottomline growth as income and costs (overheads and credit) growth normalises. Stay Neutral.