- Maintain BUY and MYR24.60 TP, 21% upside with c.3% yield. Hong Leong Bank’s 2QFY23 (Jun) results are slightly ahead of estimates, with strong non- II growth, benign credit cost and better-than-expected contribution from Bank of Chengdu (BOCD) being the key variances. While the NIM guidance was toned down, HL Bank is well on track to hit its other targets. We have adjusted our FY23-25 forecasts upwards. We continue to like the stock for its healthy earnings growth trajectory and asset quality.
- 2QFY23 results a slight beat, with 1HFY23 net profit of MYR2bn (+27% YoY) accounting for 54% of our and 52% consensus FY23F earnings, due to reasons mentioned above. Reported ROAE was at 12.8% – comfortably above the FY23 target of >12%. Capital remains healthy, with CET-1 ratio at 13% vs 12.9% in the preceding quarter. HL Bank declared an interim DPS of 21 sen (1HFY22: 18 sen). While the payout ratio appears low at 21%, it typically pays a higher second interim DPS, and guided for a full-year payout ratio of c. 35%.
- Stable asset quality and strong Bank of Chengdu (BOCD) numbers drive earnings. PATMI growth (+6% QoQ) was led by line items below the PIOP (-2% QoQ) level, namely lower credit cost of 6bps (1QFY23: 9bps) and higher contribution from associates (+41% QoQ). NII dropped 3% QoQ on NIM compression (-9bps QoQ to 2.09%), which in turn stemmed from statutory reserve requirement compliance (2-3bps impact) and intense deposit competition. Despite another 25bps increase in the policy rate, management now thinks NIM could end the FY closer to 2.1% vs its guidance of.2.14%. Non-II rose 7% QoQ, thanks to higher FX contribution while opex was generally well behaved (+1% QoQ) with CIR at 36.7% (1QFY23: 36%).
- Loan and deposit growth. Loans expanded 2% QoQ (+8% YoY) and management remained optimistic that the bank can continue to post above- industry loan growth, given its robust pipeline. Loan drivers are residential mortgage, SME and commercial segments. Deposits kept pace (+2% QoQ/+6% YoY), but the mix shifted to more attractive FDs and away from CASA. CASA ratio eased to 31.3% from 32.8% in 1QFY23.
- Asset quality holding up with GIL ratio stable at 0.49% and LLC at a very comfortable 210%. HL Bank continues to retain pre-emptive provisions at MYR629m but did not discount the possibility of write-backs, which could be as early as 4QFY23.
- Other highlights. BOCD’s growth has been robust. Management highlighted its preference for quality growth over quantity – even if this results in some moderation to the growth rate.
- Earnings and TP. We increase FY23-25F earnings by c. 3% to factor in the above variances, partly offset by a 2% cut to NII on lower NIM assumptions. There is no change to our MYR24.60 TP (GGM-derived 1.41x P/BV), which builds in a 2% ESG premium applied to intrinsic value, based on our in-house methodology (Figure 4).
Source: RHB Research - 1 Mar 2023
