HLBANK (FV RM12.54 - NEUTRAL) 1HFY12 Results Review: Hit by Merger Expenses

The group is poised to capitalize on longer-term growth opportunities  with a larger post-merger  organizational  footprint. However,  the slowing economic environment  in the medium term and HLBank’s relatively conservative culture could cap any immediate-term revenue upside synergies as already reflected in its lower-than-expected loans and transactional fee income growth. Despite our upward  FV  revision from RM12.15 to RM12.54 post earnings revision, we are downgrading our call to NEUTRAL from BUY, given the share price’s recent stellar run-up that outperformed the KLCI and KLFIN indices by 5.1% and 5.7% respectively over the past 3 months. Downgrade to NEUTRAL from BUY and FV of RM12.54 (2.0x FY12 P/BV, 15.1% ROE).

In line. HLBank’s annualized 1HFY12 earnings were largely in line with both consensus and our forecasts, representing 50.1% and 49.6%  of the respective full-year estimates. 2QFY11 net profit declined 6.3% q-o-q, dragged down by a one-off RM114.6m voluntary separation payout and RM12.4m in other integration cost expense which raised overhead cost by 29.5% q-o-q. Despite the lumpy voluntary separation scheme (VSS payout), annualized earnings were in line with expectations due to the positive offsetting effects of higher write-back of individual allowance and impaired loans recovery (+40.2% q-o-q).  Excluding the RM127m in total VSS and integration costs, annualized core 1HFY12 earnings came in 12.1% and 12.4% above our and consensus full-year earnings estimates, boosted by lower-than-expected loan loss provisions.

 

Lower provisions: Asset quality holds firm. The key positive takeaway was the lowerthan-expected loan loss provision, registering a net write-back of RM3.1m vs  a  net provision expense of RM23.1m in 1QFY12.  A  higher write-back of individual allowance and impaired loans recovery (+40.2% q-o-q) in the current quarter resulted in 1HFY12 annualized credit cost coming in at a significantly lower 4.5bps vs 1QFY12’s annualized 10.8bps and our full-year estimate of 41bps. Overall impaired loans of the merged entity continued to hold up well despite the economic slowdown, with absolute impaired loans declining 1.5% q-o-q and thereby,  raising the overall loan loss coverage to 141.9% from 1QFY12’s 137.8%. This further underpins  the  scope for provisions to surprise on the downside in the subsequent quarters. We revise downwards our FY12 credit cost assumption to 25bps and thus, raising our core FY12 earnings estimates by 5.7%.

Net interest management. Effective asset liability management has allowed the group to expand  on  its net interest margins (NIMs) by 11bps q-o-q, despite the intense competition for retail deposits industry-wide.  The loans-to-deposit ratio remained at a comfortable 72.9%, with management indicating a longer-term optimal target of 75% to 79%.

Source: OSK188