• Although HLB’s 1HFY6/24 NP accounted for 53% of our full-year forecast, we deem the results to be in line on anticipation of weaker 2HFY24F NP.

• We project a 12.5% hoh decline in 2HFY24F NP as we do not expect the net write-back in loan loss provisioning in 1HFY24 to be sustainable.

• Reiterate Add, given its above-industry loan growth in FY24-25F and having one of the lowest credit charge-off rates in the sector.

1HFY6/24 NP within expectations; we expect a weaker 2HFY24F NP

Although Hong Leong Bank’s (HLB) 1HFY6/24 net profit (NP) accounted for 53% of our full-year forecast (and 50% of Bloomberg consensus estimates), we deem the results to be in line on anticipation of weaker NP in 2HFY24F. This is because we do not expect the net write-back in loan loss provisioning in 1HFY24 to be sustainable. We also regard the interim DPS of 25 sen as in line with our expectation. 1HFY24 net profit rose 4.7% yoy, primarily lifted by the net write-back of RM56.8m in loan loss provisioning in 1HFY24, compared with a provision of RM62.9m a year ago.

Multitude of catalysts pushed up 2QFY24 NP to a record high

One of the bright spots of HLB’s 2QFY24 results was its ability to increase its net interest margin (NIM) by 1bp qoq while most other banks suffered qoq NIM contraction over the same period. In fact, HLB’s NIM has been gradually rising (qoq) in the past three quarters, outperforming most other banks. Other earnings catalysts in 2QFY24 were (1) a net write- back of RM5.7m in loan loss provisioning, and (2) a 20.3% yoy jump in associate contribution from Bank of Chengdu (BOC). All the above helped to lift its 2QFY24 NP to an all-time high of RM1.09bn (+4.4% yoy).

We project a hoh decline in 2HFY24F NP

We project NP of RM1.85bn for HLB in 2HFY24F, representing a hoh decline of 12.5%. This is premised on our view that the net write-back in loan loss provisioning in 1HFY24 would not be sustainable. On a yoy basis, we expect 2HFY24F NP would increase 3.3%, underpinned by higher net interest income and BOC contributions.

Reiterate Add on HLB

We reiterate our Add call on HLB, which is our top pick among Malaysian banks, as it commands one of the best asset qualities and the lowest credit cost in the sector. Its above- industry loan growth in FY24-25F and better NIM trend relative to its peers in FY24F are potential re-rating catalysts. Downside risks to our Add call include a material deterioration in loan growth and asset quality. We retain our FY24-26F EPS forecasts and DDM-based target price of RM26.30 (cost of equity of 9.5%; terminal growth rate of 4%) for HLB.

Source: CGS-CIMB Research - 29 Feb 2024