MIDF Research cuts target price for HLBank to RM17 on lack of near term earnings boost

KUALA LUMPUR (Aug 29): MIDF Research has lowered its target price (TP) for Hong Leong Bank Bhd (HLB) to RM17 (from RM20.30) on the back of lower net interest income (NII) and pre-provision operating profit (PPOP).

In a note today, the research house said it would maintain its Neutral call on the bank, despite its revised TP on HLB.

It added that while strong gross loan growth was present, this did not translate into NII growth, and non-interest income (NOII) did not provide much support.

“In addition, we are more cautious of FY20 prospect given the uncertain external environment. With no boost to earnings in the short term, we maintain our Neutral call for the stock with a revised TP of RM17 as we peg its FY20 book value per share [BVPS] to a lower price to book value [PBV] of 1.3 times (from 1.5 times) to reflect the heightened risk stemming from external uncertainties,” MIDF Research said.

In addition, MIDF Research said HLB’s management had met most of its financial year ended June 30, 2019 (FY19) targets — except for its net interest margin (NIM), which came in below 2%, and cost to income (CI) ratio, which was above 43% at 44.3%.

For FY20, HLIB wants to achieve gross loan growth of 5% to 6%, NIM of around 2%, NOII ratio of above 28%, CI ratio of 43% to 43.5%, gross impaired loans (GIL) of below 1%, and return on equity (ROE) of between 10.5% and 11%.

“We believe that HLB may have difficulties with the NIM target given the compression pressure,” the research house said.

MIDF Research said it will maintain its FY20 forecast.

The research house said HLB’s net profit growth of 1% year-on-year (y-o-y) for the financial year ended June 30, 2019 (FY19) was in line with its expectations, coming in at 95.9% of house estimates and 96.8% of consensus’ estimates.

It added that earnings growth was fully supported by write-backs and lower tax, as there was a net write-back of RM58.1 million in 2QFY19, and the amount of tax paid by the group declined 14.2% y-o-y due to a tax incentive.

However, PPOP declined 5.2 y-o-y in spite of operating expenditure (opex) being “well contained”. This was on the back of lower income, which fell 2.4% y-o-y.

In particular, NII shrank 2.9% y-o-y as a result of a lowered NIM stemming from the higher cost of funding. Interest expenses grew 14.1% y-o-y to RM4.8 billion, while NIM fell 14 basis points (bps) y-o-y to 1.96%.

“The OPR cut in May 2019 further exacerbated the matter as NIM in 4QFY19 fell -11bp quarter-on-quarter [q-o-q]. Meanwhile, NOII was relatively flat, contracting -0.7% y-o-y due to sharp decrease of -36.4% y-o-y to RM396 million in trading and investment income,” MIDF Research said.

FY19 gross loans grew 6.6% y-o-y to RM137.6 billion, on the back of expansion in most segments. Residential and hire purchase loans grew by 9.9% y-o-y to RM67.4 billion and 3.5% y-o-y to RM17.5 billion respectively.

Small to medium enterprise (SME) loans grew 6.7% to RM21.5 billion.

Unsecured loans contracted 2.2% y-o-y to RM7 billion — HLB has indicated its credit card tie-ups with GSC, AirAsia and Emirates are expected to reverse this trend.

Deposit growth in 4QFY19 moderated to 3.6% y-o-y to RM163.1 billion, from 5.7% y-o-y to RM163 billion in 3QFY19.

Meanwhile, fixed deposits grew 3.2% y-o-y to RM91.1 billion, while current account savings account (CASA) grew 1.3% y-o-y to RM41.7 billion, leading to a higher loan-to-deposit ratio of 84.4%, from 82% last year.

“We believe that this is positive as HLB has ample liquidity and do not need to fight for deposits. This should mitigate some of the pressure to NIM,” MIDF Research said.

The bank’s GIL ratio improved -9bp y-o-y to 0.78%, constituting an all-time low, and MIDF Research remarked that it is a key strength.

At 10.07am, HLB added 0.37% or 6 sen to RM16.32, valuing the bank at RM35.38 billion.

Source: TheEdgeMarkets