HLB Q1 net profit below expectations

PETALING JAYA: Maybank IB Research said Hong Leong Bank Bhd’s (HLB) net profit of RM503 million in the first quarter ended Sept 30, 2015 (Q1FY16) was below expectations at 22% of its full-year forecast and 23% of consensus.
Analyst Desmond Ch’ng said in his research report yesterday, the weaker net profit was mainly due to lower contributions from HLB’s 20%-owned Bank of Chengdu (BOC), as reflected in the 13% year-on-year (y-o-y) decline in associate income.
However, Ch’ng said, operationally, the matrixes are encouraging for HLB with decent annualised loan growth of 10%, stable net interest margins at 1.94%, a still liquid balance sheet with a loan-to-deposit ratio of 81% and a 31% y-o-y jump in non-interest income due to much higher forex income.
“Asset quality was stable while loan loss coverage is still healthy at 131%. Credit cost was benign at just 8bps (basis points) during the quarter.”
“We continue to be encouraged by the group’s strong fundamentals and liquid balance sheet,” Ch’ng noted.
“Upside surprise to FY17 earnings could emanate from the group’s MSS (mutual separation scheme),” he said, noting the research firm’s forecasts does not yet incorporate the MSS cost and benefits.
Ch’ng said, assuming a 10% acceptance rate and a similar structure to its FY12 voluntary separation scheme (VSS), HLB’s MSS could cost about RM90 million, with savings of about RM78 million per annum.
On lower BOC contributions, Ch’ng said Maybank IB Research lowered HLB’s FY 2016, 2017 and 2018 net profit forecasts by 7%, 5% and 3% respectively.
“We estimate a dilution in the group’s FY17 ROE to 10.9% from 12.3% post rights issue,” he noted.
Maybank IB Research maintained its “buy” recommendation on HLB with a slightly lower target price of RM15.10 (from RM15.20 previously), pegged to a lower 1.4 times post-rights CY2016 price-to-book value (P/BV).
“Tagging on a lower P/BV of 1.4x (vs 1.5x previously) to our proforma CY16 post-rights BV, our target price is marginally lower at RM15.10 (vs RM15.20 previously) on a cum-rights basis (RM14.50 ex-rights),” said Ch’ng.
In a separate note, Alliance DBS Research and MIDF Research said HLB’s weaker Q1 earnings due to slower contributions from BOC came in within theirs and consensus estimates.
“Contribution from its associate, Bank of Chengdu, declined (-26.5% q-o-q, -13.5% y-o-y) amidst a tougher operating environment, which was also expected, at 14% of pre-tax profit (4Q15: 17%),” said Alliance DBS Research.