Hong Leong Bank : Low LD ratio, higher CASA to cushion funding cost pressure HOLD

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Hong Leong Bank : Low LD ratio, higher CASA to cushion funding cost pressure                                   HOLD

From our recent company visit to Hong Leong Bank, we gather that there has been a decent growth in customer deposits in 3QFY17 compared to the preceding quarter. The growth was driven by initiatives to raise deposits  from its existing micro SME customers under Retail Community Banking. The group hinted of an improved CASA growth in 3QFY17, which is positive to protect its net interest margin(NIM). We understand that a more proactive cross- selling effort has been carried out to raise deposits from micro SME customers. While individual deposits are still growing, the growth of business enterprise (corporate) deposits continued to be slow. This is in line with the industry trend. The group plans to launch its advance cash management system and services to capture the key operating deposit accounts of SMEs. This will replace its present offering of Connect BIZ services. The group's liquidity position remained strong. Recall that the group LD ratio was 81.9% as end of 6MFY17. It continued to be the lowest among peers. The group's lower LD ratio than peers enables it to be less aggressive in terms of rate competition for deposits.

The group hinted of a possible rise in provisions by 20-30% at the 2QFY17 results briefing. However, this impact is yet to be ascertained, pending discussion with the central bank. We understand that any increase in provisions from implementing MFRS9 is likely to take effect only in early FY18. We have fine-tuned our net profit estimates for FY17F/18F/19F by -3.7%/0.3%/2.2% respectively. We have also lowered our forecast on the group's share of profit from BOC for FY17. Overall changes have resulted in a minimal impact to FY18 BV/share. With our projected FY18 ROE remaining at 9.6%, we are of the view that the stock continues to trade at premium valuation and lacking re-rating catalyst.  With that, we retain our HOLD recommendation on Hong Leong Bank with an unchanged fair value of RM13.80/share.

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