• Hong Leong Finance's 3Q18 net profit of S$36.7m exceeds expectations (+55.6% y-o-y, +24.0% q-o-q), supported by reversal in provisions (S$7m).
• NIM improved 27bps y-o-y as higher loan yield outpaced rise in funding costs.
• Loan book dipped 2.4% for the quarter.
• Maintain BUY, Target Price S$3.20; stock currently offers > 6% dividend yield.

What’s New

3Q18 net profit of $36.7m exceeds expectations.

• Total interest income was strong (+15% y-o-y, +1% q-o-q) led by higher loan yields, offsetting higher interest expense. NIM improved 27bps y-o-y supported by rise in average loan yield from floating rate loans which outpaced a rise in funding costs.
• Net profit was also boosted by $7m writeback in provisions.

Loan book dipped 2.4% for the quarter; grew 4.7% since Dec-2017.

• Loan growth dipped 2.4% q-o-q (+5.8% y-o-y). Since Dec-2017, loan book still grew by 4.7%. For now, Hong Leong Finance is adopting a cautious stance to write loans selectively and focus more on risks given headwinds in the macroeconomic outlook.
• According to Hong Leong Finance, branches have been actively writing HDB loans at competitive rates and terms.

Asset quality remains stable.

• Hong Leong Finance continues to maintain adequate provisions and recorded a S$7m writeback this quarter. As Hong Leong Finance mostly lends on a secured basis, we remain confident of Hong Leong Finance’s asset quality, demonstrated by its low provision and NPL levels historically.

Embarking on digital transformation journey.

• Hong Leong Finance announced that they have embarked on internally driven projects as well as projects with FinTechs as it starts its digital transformation journey and embrace the disruptive economy through innovation.

Outlook

Short-term funding costs rising, no impact on HLF for now against a rising loan yield environment.

• In the last quarter, SGD fixed deposits rates have continued to inch up. Hong Leong Finance has locked in its funding requirements for at least a year in advance as its deposit base is mainly made up of fixed deposits of up to one year. We believe there should be minimal impact on Hong Leong Finance in FY18 in the current rising loan yield environment.
• However, Hong Leong Finance’s profitability may be impacted if loan yields fail to catch up with rising deposit costs in FY19F and beyond.

Continues to be watchful on US-China trade war.

• Hong Leong Finance continues to be watchful on the US-China trade war which could have implications for Singapore.
• Hong Leong Finance also notes that the global electronics cycle has been maturing which will impact the manufacturing sector.

Valuation and Recommendation

Maintain BUY, Target Price at S$3.20.

Source: DBS Research - 15 Nov 2018