Hong Leong Bank results in line but lacking catalyst ahead, say analysts

PETALING JAYA: There is no clear catalyst for Hong Leong Bank Bhd, as the business environment in Malaysia and China remains challenging.

Kenanga Research said while the bank’s financial results for the first three months of financial year 2017 came in within expectations, loan growth would be uncertain although the bank’s management has maintained loan growth of between 5% and 6%.

The research house said besides maintaining loan growth, the bank’s management has maitained the outlook for net interest margins (NIMs) improving 5 to 10 basis points (bps), a cost-to-income of below 4% and a return of equity of 10% to11%.

“However, loan growth will be still be a challenge in this uncertain environment, coupled with management’s focus of maintaining quality and margins over loan growth.

“Although management reiterated that cost of funds will be manageable, we believe that upward pressure is likely as 80% of its deposits will mature in the second quarter, thus management’s guidance for improved NIMs for financial year 2017 (FY17) will be hard pressed,” it said in a report.

However, the research firm is optimistic on the bank’s 20%-owned Bank Chengdu’s performance, seeing likely improvement going forward from better cost discipline and prudent management.

“As asset quality from the major segments such as housing, transport and working capital showed improvement year-on-year and stability quarter-on-quarter, we are expecting asset quality to be stable going forward.

“Although management guided a gross credit charge of 25 to 30 bps, we believe improved recoveries aided by a more stable economy will push credit costs lower,” it added.

Hong Leong Bank’s core net profit in the first quarter of financial year 2017 (FY17) grew by 8% year-on-year to RM543mil due to healthy topline growth across the board, coupled with improved contribution from its overseas associate.

Contribution from its overseas associate improved to 13% of pre-tax profit. Loans growth was slower at 4% year-on-year but despite this, NIM improved by 4 bps due to efficient funding management and loan loss provisions falling by 4%.

Kenanga Research, which has a “market perform” call on the stock, maintained its earnings projections for FY17 and FY18 to RM2.106bil and RM2.246bil, respectively.

It left the target price unchanged at RM13.56.

Meanwhile, Affin Hwang Capital Research believes the bank’s earnings sustainability, going forward, will be underpinned by domestic operations as well as in Singapore.

This will happen as the bank leverages new financing solutions such as healthcare financing in Singapore and Malaysia, which it is aiming to grow to RM1bil by 2018, besides growing digital banking with consumers and SMEs and targeting higher bancassurance fees from wealth management activities.
Read more at http://www.thestar.com.my/business/business-news/2016/11/24/hong-leong-bank-results-in-line-but-lacking-catalyst-ahead-say-analysts/#LeCK6osxwr8M2M78.99