Hong Leong Bank - Undetected super strong core net earnings trend BUY

- We maintain BUY on Hong Leong Bank Bhd (HLBB), with a higher fair value of RM14.10/share (from RM13.00 previously). This is based on an adjusted (for rights) ROE of 15.6% (from 14.7%) FY12F, leading to a fair P/BV of 2.3x (from 2.1x previously). 

- We believe HLBB’s is underappreciated for its strong core net earnings trend, which had remained undetected based on its latest reported results. To recap, HLBB reported a net earnings of only RM381mil  or a 6% decline on QoQ basis. 

- However, net earnings was affected by a few one-off items. First, non-interest income was still affected by RM32mil loss on its hedge contracts. More importantly, this disguised the strong trajectory in all portions of its sustainable fee income, in particular its credit card fees. Credit card related fees is estimated to have easily doubled from HLBB’s pre-merger levels, and this is largely due to effective harvesting of HLBB’s new number two (from number 3 previously) ranking in terms of credit card positioning. We have upgraded our noninterest income substantially by 28% FY12F, and 20% respectively for FY13F and FY14F.   

- Secondly, asset quality has turned out to be much better than expected. We understand that that there had been no worrying signs in terms of the merged entity’s impaired loans level. We are also reassured there is close monitoring of aging of loans going by days as part of its pre-emptive monitoring process. Thus, we are now lowering our assumption for credit costs for HLBB,  to 39bps (from 70bps previously) for FY12F, and 41bps (from 70bps previously) FY13F. The company’s credit costs guidance is 30bps to 60bps FY12F.  

- Third, overhead expenses was overstated by a significant 38% in 2QFY12, based on the reported results which included one-off items such as the VSS costs. But more importantly, even if we are to strip off the one-off items, we estimate normalised merged group’s opex to be easily 4% lower than HLBB-EON Bank’s standalone basis and 5% below our estimates. We are thus reducing overall overhead expense by 5% FY12F, 12% FY13F and14% FY14F.

- HLBB is well track to realise further synergies from this merger but we believe it remains underappreciated for its strong execution track record to date. We remain positive on HLBB. Key catalysts for HLBB are:- (a) stronger-than-expected top line growth; (b) sustained asset quality, (c) seamless integration in its merger with EON Bank; (d) better-than-expected ROE of close to its internal target of 16% to 17%.

Source: AmeSecurities