KUALA LUMPUR (Feb 27): Shares in Hong Leong Bank Bhd soared to a record high of RM19.20 this morning after posting a 24% year-on-year (y-o-y) increase in its second quarter net profit at RM638.07 million due to higher profit from Bank of Chengdu.

At 12.08pm, the third top gainer on Bursa Malaysia climbed 58 sen or 3.13% to RM19.10 with 433,400 shares transacted, giving it a market capitalisation of RM39.11 billion. In a year, the stock has grown 45.24%.

Yesterday, Hong Leong Bank reported net profit growth for the second quarter ended Dec 31, 2017 (2QFY18) from RM549.94 million because of higher revenue, increased share of profit from Sichuan Jincheng Consumer Finance joint venture of RM85 million, and lower allowance for impairment losses on loans, advances and financing.

Quarterly revenue rose 4% to RM1.23 billion versus RM1.18 billion a year ago.

It will pay a dividend of 16 sen per share for the financial year ending June 30, 2018 (FY18).

For its first half (1HFY18), net profit rose 21% to RM1.32 billion from RM1.09 billion a year ago, while revenue grew 6% to RM2.41 billion from RM2.27 billion.

Kenanga Investment Bank Bhd revised its earnings forecast by 4% to RM2.41 billion for FY18 and by 6% to RM2.5 billion for FY19, on account of stronger contribution from Bank of Chengdu.

Its analyst Ahmad Ramzani Ramli upgraded the rating to "market perform" as total returns are more than 5%, with a higher target price of RM18.40 based on a blended FY19E price to book (PB) and price earnings (PE) ratio of 1.54 times and 14.5 times, respectively.

"Our valuation implies a one or two standard deviation above the PB/PE five-year mean. We feel this is justifiable given the robust contribution from BOCD (Bank of Chengdu) and strong net income margin ahead," he said.

Affin Hwang Investment Bank Bhd raised Hong Leong Bank's earnings by 3% to 6% for FY18 to FY20 to factor in a 25-basis-point overnight policy rate hike and lower operating expenses due to cost savings from branch rationalisation initiatives.

Its analysts Tan Ei Leen and Syazwan Aiman Sobri said Hong Leong Bank continues to generate solid 1HFY18 operating income while Bank of Chengdu's earnings contribution was up 111.7% y-o-y.

"Though loan growth remains subdued as at December 2017 (+1.8% y-o-y), we believe it could potentially accelerate in FY19 to FY20 given HLBB's (Hong Leong Bank's) ample balance sheet liquidity to fuel loan growth," they said.

Tan and Syazwan added that the digitisation strategies and branch transformation initiatives could also lead to lower overhead, target being less than 40% within next three years.

They reaffirmed their "buy" call and raised target price to RM20 based on 1.62 times to price to book value (PBV) for 2018, from RM18.50.

MIDF Amanah Investment Bank Bhd analyst Imran Yassin Yusof said gross loans growth came in much lower than expected with +1.8% y-o-y to RM125.5 billion as at 2QFY18.

"There was a pullback in working capital, unsecured and hire purchase loans. These loans segment fell 3.5% y-o-y to RM22.4 billion, 3.4% y-o-y to RM5.67 billion and 4.5% y-o-y to RM17.31 billion, respectively.

"However, we understand that besides lower vehicle demand, the group was also selective in regards to hire purchase loans. Conversely, mortgages grew strongly by 9% y-o-y to RM59.12 billion," he said.

MIDF maintained its "neutral" rating on the stock as there is no pressure to its earnings in the near term. Target price was adjusted to RM18.55 from RM15.72 and pegged FY19 book value per share to PBV of 1.5 times (from 1.4 times) which is its five-year historical average PBV.

The research house likes that Hong Leong Bank's net income margin continues to improve but it has moderated due to a disappointing loans growth, and so does not foresee any immediate catalyst that can boost its earnings.

"We believe the recent share price momentum was due to investors adjusting the valuation of the group towards its historical average," Imran said.