Review

• HLBB’s 1QFY17 net profit of RM542.6mn represented 26% of our full year forecast. The bank’s results came within expectations - with operating income, operating expenses and total allowances accounting for 25%, 23% and 25% of our FY17 estimates.

• Sequentially, net profit contracted by 2.8%. Gains from a 1.6% increase in total income and 0.6% decline in operating expenses were eliminated by a normalization in the loan allowances. To recap, HLBB reported healthy write back of impairment losses on loans in 4QFY16.

• Compared to 1QFY16, net profit advanced by some 7.9% YoY, underpinned by higher operating income and RM10mn increase in profit contribution from associates. Total income climbed 7.1% YoY, led by increases in net interest income (NII) (+4.6% YoY), non-interest income (non-NII) (+11.0% YoY) and income from Islamic Banking operations (+13.2% YoY).

• The increase in NII was underpinned by stronger loan growth coupled with an expansion in net interest margin (NIM). According to HLBB, 1QFY17 NIM broadened to 2.01% from 1.94% a year ago. QoQ, NII climbed as NIM improved by 6 bps on the back of more effective loan pricing and funding cost management.

• Loans advanced by 4% YoY, within our loan growth assumption of 5% for FY17. Loans advanced for the purchase of residential properties (+12.1% YoY) and SMEs (+8.2% YoY) grew the most in 1QFY17. Exposure to unsecured loans (such as credit cards and personal loans) accelerated by 5.1% YoY.

• Rising in tandem, total deposits broadened by 4% YoY. HLBB’s strength in individual deposit remained intact with market share of some 12.3%, an increase from 11.2% in FY15. Individual deposits climbed by close to 17% YoY. Meanwhile, placements by business enterprises contracted by 11.7% YoY. Rising 2.7% YoY, CASA made up 25% of total deposits in 1QFY17. FDs saw a 5.4% YoY increase. The loan to deposit ratio stood little changed at 81.0% - below the industry’s average of 90.1%.

• Including Islamic Banking operations, non-NII rose to RM295mn from RM263mn - mostly due to higher trading and investment income. Fee income improved marginally to RM142mn during the quarter, thanks to better wealth management income (+18.0% YoY). As a percentage of total income, the non-NII ratio climbed to 26.9% (1QFY16: 25.7%).

• Operating expenses remained tightly managed. Making up 56% of total expenses, personnel cost climbed by 6.6% YoY. Savings from a sequential reduction in personnel cost will be reinvested in the bank’s digital banking transformation. As revenue outpaced expenses growth, HLBB’s cost to income (CTI) ratio improved to 44.8% from 45.2% a year ago.

• Compared to 1QFY16, total allowances climbed to RM26mn from RM21mn. Asset quality stayed resilient although the gross impaired loans (GIL) ratio deteriorated slightly to 0.84%, increasing from record low of 0.79% in FY16. Loan loss coverage also dipped to 113% (FY16: 120%). Solid asset quality is registered both domestically (GIL ratio: 0.87%) and overseas (GIL ratio: 0.26%) with key segments namely properties and SME registering YTD improvements in the GIL ratio.
• Elsewhere, its capital position remains strong with a CET1, Tier 1 and Total Capital Ratio of 12.9%, 13.3% and 14.8%.

Impact

• No change to our earnings estimates.

Outlook

• While the macro outlook remains challenging in China, we believe downside risk stemming from Bank of Chengdu (BOCD) has abated. In 1QFY17, management noted that the bank appears to be demonstrating signs of recovery. We also understand that the NPL deterioration has eased on the back of efforts to ramp up recovery and strengthen stringent credit processes.

• Domestically, loan and market activities remain tepid although asset quality continues to be resilient as the bank boasts top 2 leadership position in areas of GIL and coverage ratios. Furthermore, we note HLBB does not have significant exposure in risky sectors such as O&G and steel manufacturing, thus defending the bank against lumpy corporate provisions.

Valuation

• TP is maintained at RM13.00. However, given that the total upside potential is limited to less than 5%, we maintain our sell recommendation on HLBB. Our TP translates to an implied FY17 PBV of 1.17x. At current share price, the stock continues to trade at a premium to the industry’s and mid-cap peers’ average of 1.15x and 1.03x respectively.

Source: TA Research - 23 Nov 2016