Sterling growth from BOC contribution
? HLB’s 1HFY6/22 CNP was above our expectation (59% of our full-year forecast), due to lower-than-expected LLP and higher BOC contribution.
? Even with our expectation for a weaker 2HFY22F, we are projecting a CNP growth of 5.7% in FY22F (+14.8% excluding the Makmur tax).
? Reiterate Add given the strong growth in associate contribution from BOC, and its quality as one of the most defensive against Covid-19 credit risks.
1HFY22 core net profit above our expectation
Hong Leong Bank’s (HLB) 1HFY6/22 core net profit (CNP) was above our expectation at 59% of our full-year forecast, due to lower-than-expected loan loss provisioning (LLP) and higher-than-expected associate contribution from Bank of Chengdu (BOC). However, 1HFY6/22 CNP was in line with market expectation, at 50% of Bloomberg consensus’ estimate. HLB’s interim DPS of 18 sen was in line with our expectation.
Twin earnings drivers for 2QFY22 earnings
HLB’s 2QFY22 total revenue dipped by 2.1% yoy (-0.6% qoq) due to lower non-interest income. However, 2QFY22 CNP rose by 10.1%, thanks to: 1) an 86.2% yoy plunge in LLP, and 2) a 49.9% yoy jump in associate contribution (mainly from BOC). The group’s 2QFY22 CNP fell by 17% qoq as it started to capture the Cukai Makmur tax in the quarter.
Projecting a 5.7% growth in FY22F despite Cukai Makmur
We are projecting a 14.2% hoh drop in HLB’s 2HFY22F CNP, as we conservatively expect slower growth in BOC’s contribution and a hoh rise in LLP. Even with the expectation of a weaker hoh 2HFY22F CNP, and the negative impact from the Makmur tax, we are projecting a 5.7% growth in HLB’s FY22F CNP. Excluding the Makmur tax, our projected FY22F CNP growth would be a spectacular 14.9%.
Upping FY22-24F CNP forecasts
We raise our FY22-24F CNP forecasts by 4-9% as we: 1) cut our projected LLP by 30- 51%, and 2) increase the projected associate contributions from BOC by 11%. This leads to a rise in our target price from RM20.56 to RM21.80.
Reiterate Add on HLB
We retain our Add call on HLB given the potential re-rating catalyst from its above industry loan growth, the strong expansion in associate contribution from BOC, and the declining trend in LLP (a yearly trend from FY21 to FY23F). We also believe HLB is one of the most defensive banks against the credit risks from Covid-19, given its credit charge-off rate of only 9bp in 2QFY22, possibly the lowest in the sector.