• Maintain BUY with higher MYR24.60 TP from MYR23.90, 18% upside with c.3% yield. Hong Leong Bank’s 1QFY23 (Jun) results were within expectations, with strong NII growth, lower CIR, and benign credit cost being key standouts. With the encouraging results, management raised its FY23 targets, with ROE guidance raised to >12% (from c.11%). We believe share price will continue to grind higher supported by its healthy earnings growth trajectory and strong asset quality.

• 1QFY23 in line, with net profit of MYR981.4m (+8% QoQ, +14% YoY) accounting for 26% of our and consensus’ FY23F earnings. Reported ROAE was 12.6% – above management’s FY23 target of c.11%. Capital remains healthy with CET-1 ratio at 12.9% vs 13.4% in the preceding quarter.

• 1QFY23 growth drivers. Against 4QFY22, PIOP was up a moderate 2% QoQ as strong NII growth of 6% QoQ and the 3.5% QoQ cut in opex were mitigated by higher losses from investment securities. With impairment charges up 25% QoQ and contributions from Bank of Chengdu (BOCD) down 10% QoQ, group pretax profit slipped 2.5% QoQ.

• NIM and loan growth. NIM widened by a solid 8bps QoQ to 2.18% in 1QFY23 helped by the 75bps rise in the overnight policy rate (OPR) in May, July, and September. Taking into account the 25bps hike in November, and expectations for a another 25bps increase in 1Q23, management revised its NIM guidance to c.2.14% from >2.10%. The NIM of 2.14% takes into account the deposit competition and expected rise in cost of funds. Management is also optimistic the bank can continue to post above industry average loan growth in FY23F. Growth of 7-7.5% (FY22: +8%) would come from the residential mortgage, SME, and commercial segments.

• Asset quality remains solid in 1QFY23 with GIL ratio stable at 0.49% and LLC a very comfortable 212%. Management has also maintained pre-emptive provisions at MYR629m. Although rising interest rates would exert some pressure on asset quality, HL Bank believes the rise in GIL would remain well controlled at c.0.6% (revised from <0.75%; 1QFY23: 0.49%). This has also led to a lower credit cost guidance of c.10bps vs 10-15bps previously. In 1QFY23, annualised credit cost was 9bps.

• Other highlights. BOCD contributions were up 23% YoY to MYR260m. Management believes BOCD’s profits can be sustained in FY23F with the city’s infrastructure and expansion plans supporting the bank’s business momentum. HL Bank’s cost growth is well controlled and management expects CIR to be stable at ≤38% in FY23F (revised from ≤40%).

• Earnings and TP. We make no changes to our FY23F-25F earnings as revisions for higher NIMs are offset by downward adjustments for non-II and slightly higher provisions. Still, our TP is raised to MYR24.60 from MYR23.90, due to upward revision in intrinsic value to MYR24.11 (GGM-derived 1.42x P/BV) with a 2% ESG premium applied, based on our in-house methodology (Figure 4).

Source: RHB Research - 30 Nov 2022