HLBANK’s 9MFY24 net profit (+7% YoY) met expectations, seemingly poised to overachieve on its loans growth and credit cost targets. Its associate, Bank of Chengdu (BOCD) appears to be moderating in terms of contributions but this could be compensated by the group’s overall stronger operations and market share. We raise our FY24F-FY25F earnings by 2%-1%, maintain our OUTPERFORM rating and raise our GGM-derived PBV TP by 8.3% to RM26.20 as we roll over our valuation base year.

Within expectations. HLBANK’s 9MFY24 net profit of RM3.16b made up 79% of our full-year forecast and 78% of consensus full-year estimate. No dividend was declared this quarter as the group typically pays biannually.

YoY, 9MFY24 net interest income grew slightly (+1%) as continued stress in NIMs (1.78%, -12 bps) offset the 8% growth in loans book. Meanwhile, non-interest income dipped by 15% due to softer treasury and forex gains. Though total income declined by 2%, 9MFY24 net profit grew by 7% on the back of the group’s net write-back position of RM83m (9MFY24 net impairment: RM101m) while its associate, BOCD showed sustained growth in its contributions (+25%).

QoQ, 3QFY24 total income fell by 2%, no thanks to softer investment performance. Net profit declined further by 4% mainly from BOCD’s performance moderating (-14%) from a softening operating environment there.

Briefing highlights. All targets are on track for HLBANK with the group believing that it could close the year with some outperformance.

1. Despite reporting an 8% loans growth which is above its 6%-7% target, the group did not revise its guidance but offers that retail mortgage and SME loans continue to be highly supported.

2. While NIMs are lower on a YoY-basis, its continued recovery on a QoQ-basis (+2 bps) is landing well within its guidance of 1.8%-1.9%. The group has made headways in optimising its liability management and could likely see further sequential gains.

3. The group had remained in a net writeback position over the last three quarters. In spite of this, the group still holds an unchanged management overlay of RM574m which it is likely to maintain as it engages in continued stress testing. That said, in lieu of accounting requirements, the group would likely be required to utilise this balance in the upcoming FY25 while keeping its 10 bps credit cost guidance for FY25.

4. With regards to non-interest income, the group appears to be experiencing unfavourable trading conditions which may continue to drag overall performance. On the flipside, its fee-based income streams appear to be holding up, likely thanks to its growing loans and deposit books.

5. BOCD appears to begin showing some easing QoQ with minor stress arising from headwinds in the Chengdu market. However, the group opines that downside risks are well-managed with collaborative efforts with the group looking to bolster operational capabilities Forecasts. Slightly increased from 3QFY24’s model inputs.

Maintain OUTPERFORM with a higher TP of RM26.20 (from RM24.20), as we roll over our valuation base year to CY25F BVPS of RM20.26. This is against an unchanged GGM-derived PBV of 1.29x (COE: 9.9%, TG: 2.5%, ROE: 12.0%) We continue to view the stock as a solid pick for investors seeking stability, as the group’s GIL ratio remains to be one of the lowest amongst peers whilst it is still able to generate better-than-industry loans growth. Meanwhile, BOCD is expected to be a sustainable contributor in the near term. That said, dividend expectations are moderate against the group’s emphasis for sustainable payments. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than- expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR. 

Source: Kenanga Research - 31 May 2024