Maintain hold at RM8.55 with target price raised to RM9.12: HLB’s 9MFY10 results came in below house but within market expectations as net profit for the period achieved 70% and 75% of house and consensus full-year estimates respectively.

The bank’s 9MFY10 net profit declined by 2.7% to RM686.9 million due to (1) lower net interest, (2) higher loan-loss provision, (3) lower non-interest income and (4) higher operating expenses. This was partly mitigated by (1) higher contribution from associate Bank of Chengdu, (2) higher Islamic banking income and (3) lower effective tax rate.

In terms of segmental results, pre-tax profit contribution from the corporate and commercial banking division continued to trend downwards with a 46.9% fall year-on-year (y-o-y).

While HLB’s loan growth has been tepid, 3QFY10 has seen an uptick, particularly lending for purchase of residential property which grew 5.2% quarter-on-quarter (q-o-q). Year to date (YTD), gross loans expanded by 5% or 6.7% on-year.

The loan-to-deposit ratio continues to remain the lowest amongst its peers at 54.2%, although it has increased from preceding quarter’s 53.5%.

After falling for three consecutive quarters, gross non-performing loans (NPL) have edged up q-o-q by 6.4% in 3QFY10 to RM775.3 million. Nevertheless, they remained below 3QFY09’s RM865 million level. Net NPL ratio also edged up to 1.2% from 1% in 2QFY10. Nevertheless, it remained at a benign level as compared to industry average of 1.8%.

We lower our FY10-FY12 earnings estimates by between 3% and 6.1%. We maintain our hold call but raise our target price to RM9.12 as we roll over our valuation to FY11 based on 1.92 times book value (one standard deviation higher than long-term average of 1.67 times). — ECM Libra Investment Research, May 25