• Stay BUY with new MYR23.70 TP from MYR23.50, 12% upside and c.3% yield. 9MFY22 (Jun) results were broadly in line, supported by healthy NII growth, lower credit costs and strong contributions from Bank of Chengdu (BOCD). Hong Leong Bank remains on track to its FY22 targets as business momentum is regaining pace after a softer 3QFY22. It is one of our Top Picks for Malaysian banks given its solid fundamentals, healthy loan growth, and digital initiatives.

• 9MFY22 results in line. 3QFY22 net profit of MYR785m (+6% QoQ, +2% YoY) lifted 9MFY22 earnings to MYR2,382m (+10% YoY), which made up 78% and 76% of our and consensus FY22 estimates. Reported ROAE was 10.6% (management target: ≥10.5%) and CET-1 ratio, a healthy 12.7%.

• Key trends in 3QFY22. Net profit was moderated by the 36% YoY drop in non-II and Cukai Makmur. PIOP fell 5% YoY mainly on an 18% drop in trading and investment income and 10.4x jump in FX losses (MYR90.5m). NII grew a healthy 6% YoY as loans expanded 4.3% YTD (annualised: 5.7%) to offset NIM compression (-4bps QoQ to 2.15% vs guidance of >2.10%) on higher cost of funds with fixed deposit promotions to lengthen the duration of deposits ahead of the expected rise in interest rates. Opex rose a modest 1% YoY, keeping CIR stable at 37.5%. Still, pretax profit increased 10% YoY as loan provisions fell 55% YoY (credit cost: 13bps vs 30bps a year ago), while profit from BOCD jumped 40% YoY to MYR248m. BOCD accounted for 24% of group profit (see Figure 1 for details).

• Asset quality. In 3QFY22, GILs rose 6.5% QoQ but GIL ratio remained low at 0.48% while LLC ratio was a high 218% (2QFY22: 251%). Loans under repayment assistance (LURA) declined to MYR6.1bn or 3.8% of gross loans as at end-Apr 2022 (end-Jan 2022: MYR26.4bn or 16.51%) on the progressive expiry of relief assistance since Dec 2021. Management intends to maintain pre-emptive provisions – built-up since FY20 – as it remains cautious on asset quality given the geopolitical tensions and rising macroeconomic headwinds.

• FY22 targets. With business activities picking up after a softer Feb-Mar 2022, management believes its FY22 targets are within reach. Demand for credit from key customer segments remain solid, and should lift loan growth within its 6-7% target. NIM is expected to hold up at c.2.1% with loan repricing on policy rate hike mitigating higher funding costs from deposit campaigns. Loan credit cost guidance of 8bps for 9MFY22, is comfortably within the guidance of c.10bps for FY22F. All in, ROE would be in line with target of ≥10.5%

• Earnings and TP. We make no changes to FY22F net profit. TP is raised to MYR23.70 from MYR23.50 on upward revision in intrinsic value to MYR23.25 (GGM-derived 1.45x P/BV) with a 2% ESG premium applied, based on our in-house methodology (see Figure 3). In Apr 2022, HL Bank issued its maiden Green Capital Securities of RM900m – a first issuance of a green AT1 bond by a bank in Malaysia.

Source: RHB Research - 31 May 2022