• Still BUY, with new MYR22.60 TP from MYR23.10, 16% upside and c.3% yield. 3QFY23 (Jun) results met expectations as sequential NIM pressure felt by Hong Leong Bank, a sector Top Pick, and associate, Bank of Chengdu (BOCD), was cushioned by stronger non-II from treasury. FY23 NIM guidance was lowered to 2% from 2.1%, but HL Bank remains on track to achieve most of its other FY23 targets. We continue to like the stock for its above-industry loan growth, while keeping asset quality solid and balance sheet liquid.

• 3QFY23 results in line, with net profit of MYR930m (-11% QoQ, +18% YoY) bringing 9MFY23 net profit to MYR3bn (+24% YoY) – 76-77% of our and consensus FY23F earnings. 3QFY23 PIOP slipped 11% QoQ, with NII down 14% due to NIM pressure, partly offset by +26% non-II growth. Costs were under control (+2% QoQ, CIR of 40% vs 2QFY23: 36.7% due to weaker income). Coupled with lower associates contribution (-16% QoQ), overall, PBT softened 14% sequentially. 9M annualised ROE was 12.3% – above the FY23 target of >12%. Capital remains healthy with CET-1 ratio at 12.9%.

• NIM down 27bps QoQ (-33bps YoY) on funding cost pressures, as well as slight build up in liquidity. Management guided down its FY23 NIM expectations to 2% from 2.1%. Based on 3Q and 9M NIM of 1.82% and 2.03%, this suggests that NIM pressure could have seen the worst. Indeed, HL Bank said that its fixed deposit (FD) rates rose to as high as 4.5% between mid-2QFY23/early-3QFY23 but have since fallen to <4% across the various tenors. May’s overnight policy rate (OPR) hike will also provide some relief.

• Loan and deposit growth. Loans expanded 1% QoQ (annualised 9M: +5%) and management remains optimistic that the bank can continue to post above-industry loan growth given its robust pipeline. Loan drivers are residential mortgage, auto, SME, and commercial segments. Despite a liquid balance sheet (LDR: 84%), deposits rose 2% QoQ (annualised 9M: +5%) with fixed and negotiable instruments of deposits rising 9%/71% QoQ. CASA ratio eased to 29.8% from 31.3% in 2QFY23, although CASA attrition did not appear too severe (-3% QoQ/-4% YoY), thanks to sticky corporate accounts.

• Asset quality stable. Impaired loans ticked up 8% QoQ (+16% YoY) with the rise mainly from working capital, personal use and residential mortgages. Nevertheless, GIL ratio remains low at 0.52% while LLC is still at a comfortable level of 197%. Overlay buffer stood at MYR614m.

• Other highlights. BOCD’s 1Q loans jumped 30% YoY, but this was dampened by NIM pressure. Asset quality remains solid (GIL ratio: 0.76%, LLC: 481%) while ROE stood at 17.8%.

• Earnings forecasts unchanged but marginal drop in TP to MYR22.60 after removing the 2% ESG premium that was previously attached following the recalibration of our in-house ESG weightage methodology.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we tweaked our ESG weightage. We assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research note Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023