Review

• Reporting a 9MFY24 net profit of RM3,162mn, HLBB’s results came within expectations, with net profit accounting for 77% of our FY24 net profit forecast. Translating to a 7.1% YoY increase, the stronger set of results was underpinned mainly by a net writeback in allowances, along with more robust contributions from associates (+24.8% YoY). ROE stood at 12.0%, meeting HLBB’s guidance of around 12% for FY24.

• Including Islamic Banking operations, 9M net interest income (NII) was unchanged at RM3,463mn compared to a year ago. The NIM declined by 18 bps YoY to 1.85% from 2.03% last year. QoQ, NIM continued to improve slightly to 1.87% from 1.85% in 2QFY24, attributed to effective asset liability management as well as an expansion in the loan portfolio.

• Total loans and advances accelerated 7.8% YoY, outpacing the industry’s growth. Retail loans rose 6.8% YoY, led by advances for Residential Properties (+6.8% YoY), Transport Vehicles (+10.6% YoY) and Unsecured Lending (+4.0% YoY). Business and Corporate broadened at a healthier pace of 10.8% YoY. SME loans advanced by 14.3% YoY, of which community SME banking ballooned by 12.4% YoY. Loan growth in overseas operations expanded at a softer pace of 5.3% YoY (2QFY24: +10.6% YoY), led by Singapore (+6.7% YoY). International operations accounted for around 7.2% of HLBB’s total loan portfolio.

• Total deposits advanced by 4.7% YoY. Deposits from Individuals and Business Enterprises increased by 7.4% and 3.9% YoY. By type, CASA deposits rebounded to grow by 7.6% YoY, thanks to community acquisition initiatives and effective cash management solutions. CASA accounts for around 30.6% of total deposits. FDs rose by 4.1% YoY. Elsewhere, HLBB’s liquidity position remained robust, with the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) at 137% and 120%, respectively.

• Including Islamic Banking operations, the 9MFY24 non-interest income (non-NII) declined by around 9.6% YoY. The softer YoY performance was underpinned by lower trading, investment & forex income, which declined by 45.4% YoY to RM213mn. On a positive note, fee income was higher at RM496mn in 9MFY24 vs RM452mn in 9MFY23. YoY, Credit card-related fees and Wealth management & Bancassurance income broadened at a stronger 11.0% and 28.1% YoY, respectively.

• Operating expenses grew at a modest pace of 3.9% to RM1,711mn from RM1,646mn in 9MFY23, mostly due to higher personnel costs. On the back of negative JAWs, HLBB’s cost-to-income (CTI) ratio broadened to 39.8% vs 37.6% a year ago.

• 9MFY24 net credit cost stood at -4 bps, better than management’s FY24 target of around 10 bps, due to a net writeback in allowances amounting to RM82mn from an impairment of RM101mn in 9MFY23. Despite writebacks, HLBB continues to be backed by a cumulative pre-emptive impairment buffer of RM574mn.

• Headline asset quality remains solid with the total gross impaired loans little changed at RM1,074mn (FY23: RM1,042mn). The gross impaired loans ratio (GIL) was also stable at around 0.57% (FY23: 0.57%). The GIL ratio for domestic operations improved by 1 bps YTD to 0.58%, while the GIL ratio for overseas operations rose by 7 bps YTD to 0.50%. By major segments, the GIL for transport vehicles and SMEs weakened by 11 and 14 bps YTD to 0.33% and 1.20%. Meanwhile, the GIL ratio for residential properties improved by 3 bps YTD to 0.42%. Other asset quality indicators, such as loan loss coverage, remained fairly healthy at 154% (FY23: 169%).

• The capital position remained healthy with a CET1 and Total Capital Ratio of 12.5% and 15.5%.

Impact

• No change to our earnings estimates.

Outlook

• HLBB's business performance remained resilient, underpinned by robust loans/financing growth, stable sequential NIM, disciplined cost management and solid asset quality. The YTD performance is largely on track to meet guidance for the financial year. To recap, HLBB is looking at 1) a loan growth of 6-7%, 2) a more stable (but lower) NIM of 1.8% to 1.9%, 3) tightly controlled expenses with CTI targeted to be maintained below 40%, 4) resilient asset quality with GIL ratio at <0.7%, and net credit cost of around 10 bps. Taken together, HLBB foresees FY24 ROE to be at around 12%.

• Anchoring on its solid foundation, HLBB expects to deliver another set of healthy earnings growth by the end of FY24. However, we anticipate some downside risk due to potentially softer contributions from Bank of Chengdu (BOCD). Despite BOCD's healthy performance, with a 24.8% YoY growth, its earnings momentum is slowing sequentially, influenced by ongoing macroeconomic headwinds in China. BOCD currently contributes to around 31% of HLBB’s PBT.

Valuation

• Updating beta assumptions, we adjust HLBB’s TP to RM22.00 from RM23.30. Our valuation is based on an implied PBV of around 1.32x, derived using the Gordon Growth Model. We reiterate our Buy rating on HLBB.

Source: TA Research - 31 May 2024