Review

• Registering 1QFY20 year net profit of RM688.6mn, HLBB’s results are in line with expectations, representing 27% and 25% of ours and consensus full year estimates. Net profit fell 2.6% YoY, underpinned by contractions in total operating income and lower contribution from associates. Sequentially, net profit climbed 8.2%, thanks to a net impairment writeback amounting to some RM8.9mn during the quarter. Annualised ROE stood at 10.7%, within management’s guidance of 10.5% to 11%.

• 1QFY20 total income slipped by 2.7% YoY largely due to a decline in noninterest income (non-NII). Meanwhile, the net interest income (NII) (including Islamic Banking operations) broadened by 3.5% YoY (+7.7% QoQ) due to an acceleration in loan growth along with healthier net interest margin (NIM).

• Total loans and advances climbed by 6.8% YoY – exceeding FY2020 target of 5-6%, and outpacing industry’s growth. Led by retail, advances for mortgages climbed 10.2%. SME loans also grew at an encouraging pace of 8.9% YoY, of which community SME banking soared by 37.2% YoY. Loan growth in overseas operations were led by Vietnam (+37.4% YoY) and Cambodia (+22.1% YoY). International operations accounted for some 5% of HLBB’s total loan portfolio.

• Net interest margin (NIM) climbed both on a QoQ and YoY basis. Rising 14 bps QoQ and 5 bps YoY, the increase was mostly underpinned by repricing of high cost fixed deposits post OPR.

• Total deposits rose 3.0% YoY, supported by expansion in deposits from business enterprises (+3.0% YoY). Deposits from individuals recouped, rising 1.3% YoY. By type, CASA deposits rose 5.5% YoY in 1QFY20, accounting for some 26% of total deposits. FDs grew 1.3% YoY. Elsewhere, HLBB’s liquidity position remained robust with LCR and LDR at 126% and 84.8% respectively.

• Including Islamic Banking operations, non-NII slipped to RM334mn from RM349mn in 4QFY19 and RM397mn a year ago. Excluding gains of RM72mn in 1QFY19 from divestment of a JV, non-NII would have risen by 2.8% YoY. Fee income improved, supported by a 17.2% YoY increase in Wealth Management income. However, muting gains, credit card fees dipped 4.3% YoY. Elsewhere, softer non-NII was also attributed to lower trading and investment income.

• Operating expenses remained tightly managed, falling 1.5% QoQ and 0.6% YoY. As such, the cost to income (CTI) ratio softened to 43.0% from 45.4% in 4QFY19 and 44.6% in 1QFY19. Bulk of the decrease in operating expenses were due to lower personnel cost (-0.7% QoQ and -1.7% YoY).

• Asset quality remained healthy as management noted that there are no pressure on any particular segment. The overseas credit portfolio continued to improve with GIL ratio falling to 0.08% vs. 0.10% in FY19. There was however, a slight uptick in Malaysia as the GIL ratio climbed marginally to 0.85% from 0.82% in FY19. That said, the total gross impaired loans climbed to RM1,124mn from RM1,071mn in FY19, bringing the gross impaired loans ratio (GIL) to 0.81% (FY19: 0.78%). By major segments, the GIL for transport vehicles and the SME segment improved 3 and 12 bps to 0.67% and 1.42%. On the other hand, the GIL ratio for residential properties rose slightly to 0.57%, compared to 0.56% in FY19. Other asset quality indicators such as loan loss coverage stood at 110% (FY19: 118%). Including regulatory reserves, the loan loss coverage ratio was stable at 196% (FY19: 197%).

• Capital position remained healthy with a CET1, Tier 1 and Total Capital Ratio of 12.8%, 13.4% and 15.7%. The Liquidity Coverage Ratio (LCR) stood at 126%, in excess of regulatory requirements.

Impact

• No change to our earnings estimates.

Outlook

• Amid the challenging macro environment, results met with most of management’s key FY20 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 – such as partnership with WeChat, GSC, Air Asia and Emirates.

Valuation

• Tweaking the risk free rate assumption to 3.6% from 4.0% in our Gordon Growth model, we derive a new implied PBV of 1.4x. With that, we adjust HLBB’s TP to RM18.10 from RM17.60 and raise the recommendation to HOLD from sell.

Source: TA Research - 28 Nov 2019