Hong Leong Bank - Encouraged by Margin Trends

Date: 
2024-02-29
Firm: 
KENANGA
Stock: 
Price Target: 
24.20
Price Call: 
BUY
Last Price: 
19.50
Upside/Downside: 
+4.70 (24.10%)

HLBANK’s 1HFY24 net profit (+5%) and dividend met expectations. Excluding associate contributions, group operating profit appears to be on a decline as it works to generate better interest margins, of which seem encouraging for now backed by sequential improvements. Maintain OUTPERFORM and GGM-derived PBV TP of RM24.20.

1HFY24 within expectations. HLBANK’s 1HFY23 net profit of RM2.12b made up 52% of both our full-year forecast and consensus full-year estimate. An interim dividend of 25.0 sen (c.25% payout) was within our anticipated 60.0 sen for the full-year, awaiting a lumpier 2HFY24 payment.

YoY, 1HFY24 total income fell by 4% as net interest income (-5%) was undermined by compressed NIMs (1.78%, -24bps) despite an 8% loans growth, amidst flattish non-interest income. Cost-income ratio rose to 39.7% (+3.3ppt) on higher personnel cost for more revenue-generating hires. Impairment-wise, the group continued to report a net write-back of RM56.8m (1HFY24 net impairment: RM62.9m). Its associate, Bank of Chengdu (BOCD) contributed a greater share (+26%) which led 1HFY24 net profit to come in at RM2.12b (+5%).

QoQ, 2QFY24 net interest income increased by 3% as both loans book (+2%) and NIMs (+5bps) grew on better margin mixes. Non-interest income also expanded by 13% on better forex gains. There were fewer write-backs during the quarter but it benefited from better BOCD deliveries, leading to 2QFY24 net profit improving by 6%.

Briefing highlights. At its half-year mark, HLBANK is still on track to meet its full-year targets and may be poised to exceed a notable few.

1. The group opted to maintain its 6%-7% loans growth target despite the 8% reported in 1HFY24 in precaution of unexpected challenges in the latter half. We gathered that mortgages were the largest contributor which we anticipate could see a pivot to more affordable packages going forward.

2. Similarly, the group’s unchanged 10bps credit cost guidance appears overly conservative amidst progressing the year in a net write-back position. That said, we believe there may be little underlying concerns in 2HFY24 as the group still retains pre- emptive buffers of RM574m.

3. HLBANK notably saw a NIMs recovery QoQ whilst several of its peers experienced further diminishment owing to seasonally tighter year-end deposits competition. While it did incur slightly higher cost of funds, the spread was made up by wider asset yields with the group able to uplift its loans-to-deposits ratio to 90.2% (1QFY24: 89.3%).

4. BOCD’s persistent growth could be attributed to continued loans expansion from Chengdu’s rising prosperity. That said, the group had refrained from offering comments due to BOCD to only formally report their numbers in Apr 2024.

Forecasts. Post results, we tweak our FY24F/FY25F earnings by - 1%/+1% from model updates on 2QFY24’s inputs.

Maintain OUTPERFORM and TP of RM24.20. Our TP is based on a GGM-derived PBV of 1.29x (COE: 9.9%, TG: 2.5%, ROE: 12.0%) based on a CY24F BVPS of RM18.71. We continue to view the stock as a solid pick for investors seeking stability, as the group’s GIL ratio remains to be one of the lowest amongst peers whilst it is still able to generate better-than-industry loans growth. Meanwhile, BOCD is expected to be a sustainable contributor in the near term. That said, dividend expectations are moderate against the group’s emphasis for sustainable payments. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR. 

Source: Kenanga Research - 29 Feb 2024

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