RHB Research has kept “BUY” rating on Hong Leong Bank, with new target price (TP) MYR23.90 from MYR23.70, which translates to 14% upside with c.3% yield. FY22 earnings are above expectations, boosted by healthy NII growth and strong contributions from Bank of Chengdu (BOCD). While still positive on prospects, management’s FY23 targets signal some level of cautiousness – given the macroeconomic uncertainty. The research house continues to like Hong Leong Bank for its solid asset quality and healthy earnings growth trajectory.
FY22 earnings beat. 4QFY22 net profit of MYR907.6m (+16% QoQ, +32% YoY) took FY22 earnings to MYR3,289m (+15% YoY), which made up 107% and 109% of the Street’s FY22 estimates. The positive variance was mainly due to better-than-expected net interest income and contribution from BOCD. Reported ROAE was at 10.9% (management’s target: ≥10.5%) and the CET-1 ratio, a solid 13.4%. A final DPS of 37 sen was declared, bringing FY22 DPS to 55 sen (payout ratio: 35%).
Key trends in 4QFY22. Pretax profit gained 18% QoQ on the recovery in non-II, lower impairment charges and higher profits from BOCD. Net interest income remained flattish QoQ, as the 3.5% QoQ loan growth was offset by the 5bps QoQ NIM slippage to 2.10%. Non-II rebounded by 88% QoQ, as gains from trading, investment and FX rose to MYR168m, vs MYR18m in 3QFY22. Net impairment charges fell 42% QoQ, lowering credit cost to 7bps (3QFY22: 13bps). Profit from BOCD rose 17% QoQ to MYR290m, accounting for 23.8% of group profit.
FY23 targets. Management believes HL Bank will see a sustained business momentum in FY23. Still, FY23 targets appear somewhat conservative, with the ROE target at c.11%. The bank is aiming for 7% YoY loan growth – which would point to another year of above-industry growth, supported by a healthy pipeline of lending to consumers and SMEs. NIM, while anticipated to rise by 8bps to 2.18% in 1QFY23, is expected to be stable-to-slightly-better than FY22’s 2.14% with the build-up of fixed deposits (FDs) mitigating hikes in the Overnight Policy Rate (OPR). HL Bank’s net credit cost guidance of 10-15bps, with no reversal of management overlays, takes into account the heightened inflationary pressure and geopolitical uncertainty.
Asset quality. In 4QFY22, GILs ticked up 5.2% QoQ but the GIL ratio stayed low at 0.49%, while the LLC ratio was at a high 212% (3QFY22: 218%). Loans under repayment assistance (LURA) were at a lower MYR4.3bn (2.6% of gross loans) as at end-July 2022 (end-Mar 2022: MYR7.4bn or 4.5%) on the progressive expiry of relief assistance since Dec 2021. Management intends to maintain pre-emptive provisions of MYR629m, given the macroeconomic headwinds.
Earnings and TP. The research house raises FY23-24F net profit by c.5%, after pencilling in better NIM as well as higher core fee income and profits from BOCD. Its TP rises to MYR23.90 from MYR23.70, due to upward revision in intrinsic value to MYR23.41 (GGM-derived 1.43x P/BV) with a 2% ESG premium applied.
