Hong Leong Bank (HL Bank)’s quarter three financial year 2023 results met expectations as sequential net interest margin pressure felt by Hong Leong Bank, a sector Top Pick, and associate, Bank of Chengdu (BOCD), was cushioned by stronger non-interest income from treasury.
Financial year 2023 net interest margin guidance was lowered to 2% from 2.1%, but HL Bank remains on track to achieve most of its other financial year 2023 targets, said RHB Research (RHB) in the recent Malaysia Results Review Report.
“We continue to like the stock for its above-industry loan growth, while keeping asset quality solid and balance sheet liquid,” said RHB.
Quarter three financial year 2023 results in line, with net profit of RM930 million bringing nine months financial year 2023 net profit to RM3 billion, 76-77% of our and consensus financial year 2023 future earnings.
Quarter three financial year 2023 pre-impairment operating profit slipped 11% quarter-on-quarter, with net interest income down 14% due to net interest margin pressure, partly offset by +26% non-interest income growth.
Costs were under control. Coupled with lower associates contribution, overall, profit before tax softened 14% sequentially. 9 months annualised return on equity was 12.3%, above the financial year 2023 target of more than 12%. Capital remains healthy with a common equity tier one ratio at 12.9%.
“Net interest margin down 27 basis points quarter-on-quarter on funding cost pressures, as well as slight build up in liquidity. Management guided down its financial year 2023 net interest margin expectations to 2% from 2.1%,” said RHB.
Based on quarter three and nine months net interest margin of 1.82% and 2.03%, this suggests that net interest margin pressure could have seen the worst. Indeed, HL Bank said that its fixed deposit rates rose to as high as 4.5% between mid-quarter two financial year 2023/early-quarter three financial year 2023 but have since fallen to less than 4% across the various tenors. May’s overnight policy rate hike will also provide some relief.
“Loans expanded 1% quarter-on-quarter and management remains optimistic that the bank can continue to post above-industry loan growth given its robust pipeline,” said RHB.
Loan drivers are residential mortgage, auto, small medium enterprise, and commercial segments. Despite a liquid balance sheet , deposits rose 2% quarter-on-quarter with fixed and negotiable instruments of deposits rising 9%/71% quarter-on-quarter.
Current account savings account ratio eased to 29.8% from 31.3% in quarter two financial year 2023, although current account savings account attrition did not appear too severe, thanks to sticky corporate accounts.
Impaired loans ticked up 8% quarter-on-quarter with the rise mainly from working capital, personal use and residential mortgages. Nevertheless, gross impaired loan ratio remains low at 0.52% while loan life coverage ratio is still at a comfortable level of 197%. Overlay buffer stood at RM614 million.
BOCD’s quarter one loans jumped 30% year-on-year, but this was dampened by net interest margin pressure. Asset quality remains solid while ROE stood at 17.8%.
Earnings forecasts unchanged but marginal drop in trading price to RM22.60 after removing the 2% environmental, social and governance
premium that was previously attached following the recalibration of our in-house environmental, social and governance weightage methodology.
