This article first appeared in The Edge Financial Daily on August 30, 2018

Hong Leong Bank Bhd
(Aug 29, RM20.28)
Maintain hold with higher fair value of RM20.20: Hong Leong Bank Bhd (HLBB) delivered core net profit of RM653 million in the fourth quarter ended June 30, 2018 (4QFY18), up 4.9% quarter-on-quarter (q-o-q) and 35.2% year-on-year (y-o-y) after adding back the one-off loss of RM27 million from the dilution of stake in Bank of Chengdu Co Ltd (BoC). Recall that the listing of BoC has reduced HLBB’s stake from 19.9% to 18%.

For its full year ended June 30 (FY18), core earnings of RM2.59 billion grew 15.6% y-o-y, underpinned by higher total income, lower provisions and higher share of profit from BoC. Cumulative earnings came in within expectations, making up 101.4% of our and 100.6% of consensus estimates.

The group’s loan growth picked up momentum in 4QFY18. It accelerated to 3.1% y-o-y versus 1.6% y-o-y in the preceding quarter. Loan growth continued to be driven by mortgage, and small and medium enterprise loans. Both domestic and international loan growth improved compared with 3QFY18.

Net interest margins in 4QFY18 fell seven basis points (bps) q-o-q to 2.03%. This was due to higher funding cost arising from the upward repricing of deposit rates adjusting to the overnight policy rate hike of 25bps in January 2018 and higher cost for wholesale deposits.

It recorded a positive jaws ratio of 3.7% for FY18 with total income growing faster than operating expenditure. Its cost-to-income ratio based on core income improved to 42.9% for FY18.

Profit contribution from associate BoC slowed down in 4QFY18, declining 14.9% y-o-y to RM112 million, making up 14.4% of the group’s profit before tax (PBT). For full-FY18, contribution from BoC rose 50.5% y-o-y to RM516 million, contributing 15.9% of group PBT.

Gross impaired loan ratio inched up to 0.87% from 0.84% due to upticks in impairments of mortgage and hire purchase loans. Credit cost stayed low at 0.06% versus our expectation of 0.10% for FY18. Excluding recoveries, gross credit cost was 24bps for FY18.

A final dividend of 32 sen per share has been declared leading to total dividend of 48 sen per share.

Fully diluted group common equity tier 1 (CET1) ratio continued to be healthy at 12.6%. The group will implement Malaysian Financial Reporting Standards 9 on July 1, 2018. The indicative day-one impact of the adoption of the new standard will be a 13bps fall in common CET ratio and a 14bps drop in Tier 1 capital ratio. Provisions will increase by 25% but this will be cushioned by its regulatory reserves resulting in a minimal impact on the group’s retained earnings. — AmInvestment Bank, Aug 29