Review

• HLBB’s 1HFY17 net profit of RM1,092.6mn represented 53% of our full year forecast. The bank’s results came within expectations - with operating income, operating expenses and total allowances accounting for 51%, 47% and 50% of our FY17 estimates.

• Sequentially, net profit recovered from the sequential decline in 1Q, to increase by 1.3% in the current quarter. Gains from a 7.5% increase in total income and modest 2.0% rise in operating expenses helped cushion higher loan allowances.

• Compared to 1HFY16, net profit advanced by some 29% YoY, underpinned by a combination of higher operating income and 11.6% decline in overhead expenses (due to one-off MSS cost last year). Total income climbed 8.5% YoY, led by increases in net interest income (NII) (+4.6% YoY), non-interest income (non-NII) (+15.4% YoY) and income from Islamic Banking operations (+15.4% YoY).

• The increase in NII was underpinned by decent loan growth coupled with an expansion in net interest margin (NIM). According to HLBB, 2QFY17 NIM further widened to 2.08% from 2.01% in 1QFY17 and 1.96% a year ago. Management noted that the NIM improved on the back of prudent loan pricing, effective funding cost management and redemption of some securities.

• Loans advanced by 4.6% YoY, within our loan growth assumption of 5% for FY17. Loans advanced for the purchase of residential properties (+11.4% YoY) and SMEs (+10.5% YoY) grew the most in 2QFY17. Driven by residential mortgages, the bank’s consumer loans strengthened at an encouraging pace of 6.8%, faster than the sector’s growth of 5.4%. Exposure to unsecured loans such as credit cards and personal loans also accelerated, but by a less robust pace of 2.4% and 0.7% YoY.

• Rising in tandem, total deposits broadened by 4.1% YoY. HLBB’s strength in individual deposit remained intact with market share of some 12.2%, an increase from 11.2% in FY15. Individual deposits climbed by some 16.1% YoY. Meanwhile, placements by business enterprises contracted by 11.6% YoY. Rising 2.5% YoY, CASA made up 25.4% of total deposits in 2QFY17. FDs saw a 6.7% YoY increase. The loan to deposit ratio stood little changed at 81.9% - below the industry’s average of around 90%.

• Including Islamic Banking operations, non-NII accelerated to RM640mn from RM554mn - mostly due to higher trading and investment income. Fee income rose 3.4% to RM305mn, thanks to better wealth management income (+27.7% YoY). As a percentage of total income, the non-NII ratio expanded to 28.1% (1HFY16: 26.4%).

• Operating expenses remained tightly managed. Making up 56% of total expenses, 1HFY17 core personnel cost climbed 7.2% YoY. Including one-off payment for the mutual separation scheme of RM171.7mn, total personnel cost would have fallen by close to 20%. Savings from a sequential reduction in personnel cost will be reinvested in the bank’s digital banking transformation. We note that IT expenses increased by some RM10mn to RM70.8mn from RM60.9mn a year ago. As revenue outpaced expenses growth, HLBB’s core cost to income (CTI) ratio improved to 43.6% from 45.3% a year ago.
   
• Compared to 1HFY16, total allowances decreased to RM53.2mn from RM79.1mn. Asset quality continued to show resilience although the gross impaired loans (GIL) ratio deteriorated slightly to 0.86%, rising from record low of 0.79% in FY16. Loan loss coverage also dipped to 107% (FY16: 120%). Solid asset quality is registered both domestically (GIL ratio: 0.89%) and overseas (GIL ratio: 0.25%) with the SME segment registering YTD improvement in the GIL ratio.
   
• Elsewhere, its capital position remains strong with a CET1, Tier 1 and Total Capital Ratio of 13.4%, 13.8% and 15.3%. An interim single tier dividend of 15.0 sen per share has been proposed for the current quarter – unchanged from a year ago. This translates to a payout ratio of around 28%.

Impact

• No change to our earnings estimates.

Outlook

• Management appears more optimistic with the margin outlook, revising NIM target for FY17 higher to >2.0% from <2.0%. While competition for deposits still exist, HLBB’s healthy mix of individual and CASA deposits coupled with decent LDR could help cushion against competitive pressures. HLBB noted the ability to also price up slightly on loan yields for most of its key products.

• Meanwhile, the gross credit charge guidance was lowered to 25-30 bps from 25-35 bps, noting that overall book remained solid with no major stress in any portfolio segments.

• In China, management reiterated that the downside risks in asset quality stemming from Bank of Chengdu has abated. Quality indicators have improved on the back of efforts to ramp up recovery and strengthen stringent credit processes, setting the pace for recovery in 2017.

• 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

• Rolling forward valuations to FY18 and lowering our cost of equity assumption from 10.1% to 9.5% on the back of the strength in HLBB’s earnings traction, improving asset quality and potential recovery from operations in China - we raise HLBB’s TP to RM14.90 from RM13.00. Our TP translates to an implied FY17 PBV of 1.3x. 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 1.02x respectively. We upgrade HLBB to HOLD from Sell.

Source: TA Research - 22 Feb 2017