Review

• Registering FY19 year net profit of RM2,664.5mn, HLBB’s results were in line with expectations, representing 95% and 98% of ours and consensus full year estimates. 4QFY19 net profit climbed 0.4% QoQ and 1.7% YoY thanks to lower tax rates during the quarter. However, PBT fell by 5.9% QoQ and 5.7% YoY, underpinned by a combination of softer income growth, negative JAWS and increase in loan allowances and other impairments. With that, full year PBT declined by some 1.9% YoY.

• The board proposed higher final dividend per share of 34 sen per share (4QFY18: 32 sen per share). This brings total dividend for FY19 to 50 sen (FY18: 48 sen), translating to a payout of 38% (FY18: 37%). Capital position remained healthy with a CET1, Tier 1 and Total Capital Ratio of 13.1%, 14.1% and 16.3%.

• FY19 total income slipped 2.4% YoY. Net interest income (NII) declined by 4.5% YoY despite the acceleration in loan growth. Total loans and advances climbed by 6.6% YoY, outpacing industry. Led by retail, advances for mortgages and transport vehicles climbed 9.9% and 3.5% YoY. SME loans also grew at an encouraging pace of 6.7% YoY, of which community SME banking soared by 40.1% YoY.

• The encouraging increase in loans were muted by compression in the net interest margin (NIM), which resulted in weaker NII. Citing continued funding cost pressure amidst competitive environment along with an OPR cut in the 4Q, NIM slipped to 1.96% from 2.10% a year ago. Including Islamic Banking operations, NII contracted by 2.9% YoY.

• Total deposits rose 3.6% YoY, supported by expansion in deposits from business enterprises (+6.8% YoY). Deposits from individuals fell 3% YoY. By type, CASA deposits accumulated picked up during the quarter, raising total CASA by 1.3% in FY19. With that, the CASA mix rose to 26% from 24% of total deposits in the previous quarter (unchanged compared to 26% in FY18). FDs rose 3.2% YoY. Elsewhere, HLBB’s liquidity position remained robust with LCR and LDR at 134% and 84.4% respectively.

• Including Islamic Banking operations, non-NII slipped to RM1,334mn from RM1,344mn a year ago. Excluding gains of RM90mn from divestment of a JV, non-NII would have fallen by 7.4% YoY. Fee income stood little changed at RM585mn vs. RM574mn in FY18 - supported by better credit card fees (+10% YoY). However, muting gains, wealth management income dipped 2% YoY. Elsewhere, softer non-NII was also attributed to sharply lower trading and investment income (-36.4% YoY).

• Rising 1.5% YoY, operating expenses remained tightly managed. Despite that, the cost to income (CTI) ratio rose to 44.3% from 42.6% in FY18 due to negative JAWS. Bulk of the increase in operating expenses were due to higher personnel cost (+3.8% YoY).

• Asset quality remained healthy with improvements in the domestic and overseas credit portfolios. Total gross impaired loans eased to RM1,071mn from RM1,126mn in FY18, bringing the gross impaired loans ratio (GIL) to 0.78% (FY18: 0.87%) as the GIL in Malaysia and overseas operations strengthened to 0.82% (FY18: 0.91%) and 0.10% (FY18: 0.19%). By major segments, the GIL for mortgages and transport vehicles improved 2 and 9 bps to 0.56% and 0.70%. The GIL ratio for the SME segment also strengthened 18 bps to 1.54%, compared to 1.72% in FY18. Other asset quality indicators such as loan loss coverage was stable at 118% (FY18: 89%). Including regulatory reserves, the loan loss coverage ratio stood at 197% (FY18: 155%).

Impact

• Imputing FY19 results, we tweaked our FY20/21/22 net profit forecasts to RM2,558/2,619/2,771mn from RM2,792/3,011/3,260mn previously. Our projections also reflect softer loan and fee income growth assumptions on the back of more easing envisaged from a prolonged trade war. We also foresee further contraction in NIM due to potential additional rate cuts, dampening prospects for profit growth.

Outlook

• Amid the challenging macro environment, results met with most of management’s key FY19 KPI targets. Guiding for a more muted outlook for FY20, management toned down KPIs for gross loan growth and ROE to 5-6% (from 6.6% in FY19) and 10.5% to 11% (from 10.8% in FY19). HLBB foresee earnings growth to be supported by tightly managed expenses and benign asset quality risks, along with consistent profit contribution from BOCD.

• Elsewhere, management also noted that growth will be supported by new revenue streams and cross selling opportunities from various business collaborations. Here, in addition to a partnership with WeChat, HLBB has entered into various credit card partnerships with GSC, Air Asia and Emirates. The bank will also be looking to expand its focus in underserved and growing sectors such as the halal food and agri-business, renewable energy, logistics and warehousing, health, motorcycle dealers and travel segment.

• In the meantime, HLBB will continue to invest in its strategic priority of digitizing the bank both in retail, commercial and SME. The transformation to digital banking over the past 4 years has yielded positive results with the % of transactions via digital channels rising to 81% in FY19 from 42% in FY15 – resulting in some cost savings from the rationalisation of bank branches.

Valuation

• Deriving an implied PBV of 1.36x based on the Gordon Growth Model, we adjust HLB’s TP to RM17.60 from RM20.30, underpinned by the downward revision to our earnings forecast as well as updating our beta assumption according to data obtained from Bloomberg. With that, we downgrade our recommendation for HLBB to HOLD from buy, given that the total upside is reduced to <12%.

Source: TA Research - 29 Aug 2019