Hong Leong Bank on track to meet full-year targets

PETALING JAYA: The outlook for Hong Leong Bank Bhd (HLB) is slightly more positive after the fifth-largest lender by assets in Malaysia posted strong numbers for the first half of its financial year (FY) ending June 30, 2017.

According to analysts, the bank’s solid performance thus far was indication that HLB would likely achieve its key-performance-indicators target for the current year.

“As of end first half of FY17, HLB is on track to meet all its full-year targets. Apart from a slightly more optimistic guidance on NIM (net interest margin) and credit cost, FY17 targets were largely retained,” AllianceDBS Research said.

The brokerage noted these targets included a loan growth of 4%-5%; non-interest income ratio of more than 25%; cost-to-income ratio of more than 46% and return on equity of 10%-11%.

In addition, HLB had revised its NIM target upwards from around 1.9% to more than 2%, given the dissipating pressure on its funding cost and its ability to reprice loans higher. The range of its credit cost guidance was also narrowed from 25-35 basis points (bps) to 25-30 bps.

“We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs (return-on-equity ratios),” AllianceDBS said.

The brokerage maintained its “buy” call on HLB, with an unchanged target price of RM15.

“HLB’s banking franchise remains undervalued in our view.

“We believe the market is not attributing sufficient premium to its key attributes of solid asset-quality indicators and strong liquidity position.

“In this current uncertain environment, balancing liquidity versus profitability will be crucial,” AllianceDBS said, adding that HLB’s 20%-owned associate Bank of Chengdu remained a wildcard.

HLB’s net profit increased 30% to RM1.09bil for 1H17 from RM847mil in the previous corresponding period, resulting in the group’s EPS increasing to 53.41 sen from 47.83 sen previously.

The group’s revenue rose 8.5% to RM2.27bil in 1H17 from RM2.10bil in the previous corresponding period. This was underpinned by a stable asset yield from focused loan pricing execution, coupled with prudent management of cost funds, as well as higher non-interest income contribution.

For the three months to Dec 31, 2016, HLB’s gross loans and financing grew 4.6% year-onyear to RM123.4bil underpinned by growth in its key segments of domestic retail and SMEs. Its capital position remained robust with common equity tier-1, tier-1 and total capital ratios at 13.4%, 13.8% and 15.3%, respectively, while ROE stood at 10.2%. HLB’s NIM for 1H17 stood at 2.05%.

“Despite the 25bps overnight policy rate cut and mediocre loan growth, 1H17 NIM saw improvement of 10bps y-o-y to 2.05%, driven by loan repricing initiatives, while maintaining the loan-deposit ratio (LDR) at 81.9%,” Affin Hwang Capital said.

“In our view, HLB’s FY17 outlook is expected to see a marginal core EPS (earnings per share) growth as the operating environment remains challenging to boosting loan growth, of which could be at the expense of asset quality sustainability.

“On a more positive note, we believe that HLB’s initiatives to manage NIM pressure and boost current and savings account mix would improve fund-based income generation,” the brokerage added.

Affin Hwang Capital maintained its “hold” rating on HLB, price of RM13.

Meanwhile, TA Research upgraded its rating on HLB to “hold” from “sell”, with a higher target price of RM14.90 from RM13 previously.

“Domestically, loan and market activities remain tepid although asset quality continues to be resilient as the bank boasts top two leadership position in areas of gross impaired loans and coverage ratios.

“Furthermore, we note HLB does not have significant exposure in risky sectors such as oil & gas and steel manufacturing, thus defending the bank against lumpy corporate provisions,” TA Research said.

“In China, management reiterated that the downside risks in asset quality stemming from Bank of Chengdu has abated. Quality indicators have improved on the back of efforts to ramp up recovery and strengthen stringent credit processes, setting the pace for recovery in 2017,” it added. CIMB Research was less optimistic on HLB. It maintained its “reduce” recommendation on HLB, with an unchanged target price of RM12.10.

“HLB remains a reduce given the potential de-rating catalysts of lower contribution from Bank Of Chengdu , an expected upturn in the credit-cost cycle, and unattractive valuations,” CIMB Research explained.

“While HLB performed well in Malaysia, the earnings contribution from its associate company in China, Bank of Chengdu, dwindled by about 10.1% y-o-y in 1H17.

“While management expects a mild improvement in Bank of Chengdu’s earnings in 2017, we think the road to recovery would be bumpy considering the economic slowdown in China,” it added.

HLB’s shares rose 10 sen to close at RM13.60 yesterday. with an unchanged target