HLBANK's 1QFY25 net profit (+6%) met expectations where we noted that its pre-associate earnings growth outpaced its associates. This reflects stronger core operations with the group's better-than-industry loans growth and asset quality being complemented by efforts to sustain margins going forward. However, low dividend yield relative to peers continue to be expected in the near-term. Maintain OP and GGM-derived PBV TP of RM27.40.

1QFY25 within expectations. HLBANK's 1QFY25 net earnings of RM1.09b came in at 25% of our full-year forecast and 24% of our full-year estimates.

YoY, 1QFY25 net profit increased by 6% from gains in both NII (+13%) and NOII (+24%). The group saw its loans base expanding by 7% mostly from more mortgage and corporate accounts, with funding cost management carrying NIMs to 1.92% (+8 bps). NOII meanwhile was led by forex and treasury gains. CIR remained relatively stable (39%, -0.8ppt) while annualised credit cost was well contained at 2 bps (1QFY24 was in a net write-back position). BOCD continued lead its associates growth (+6%) with its loans book expanding by 22%, mostly comprising state-backed accounts.

QoQ, 1QFY25 net profit similarly grew by 5% from the same abovementioned reasons, with NIMs reporting a 3 bps increase. We note that its associate contributions fell by 7% following both lower income and higher costs incurred by BOCD during the quarter, due to loading up of provisions.

Highlights. We call out to HLBANK's operating profit growth before associates which came in at 9% YoY and 10% QoQ, marking the first quarter with the group's core business operations performance outpacing its associates (though mostly due to BOCD's accelerated growth).

Operations remained mostly domestically led, with the group able to accumulate higher-than-industry loans growth (+4.9% CY-YTD). HLBANK continued to be retail driven with residential mortgage making up 49% of total books. Progressive expansion into higher-yield SME accounts would help HLBANK step up in its asset yields going forward, albeit without compromising on strict asset quality criteria. Its credit cost target of <10 bps and GIL target of <0.65% are among the lowest between its peers.

Forecasts. Post results, we tweak our FY25F/FY26F earnings by +1% each as we incorporate 1QFY25's numbers into our model. Concerning the upcoming Basel III implementation, the group represented a +10 bps impact to CET-1 could occur, spread across operational risk, credit risk and market RWA parameters.

Maintain OUTPERFORM and TP of RM27.40 based on an unchanged GGM-derived PBV of 1.35x (COE: 9.5%, 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. BOCD is expected to be a sustainable contributor in the near term and making up 30% of total earnings. However, 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.

Management Guidance

Source: Kenanga Research - 29 Nov 2024