Hong Leong Bank - Normalising progress

Period    3Q12

Actual vs. Expectations

 9M12 PAT of RM1,254m was within the consensus expectation (77%) but above that of ours (85%). 3Q12 PAT of RM465m rose 22.0% QoQ, normalising back after the integration cost booked in last 2Q12.  

Dividends   None for the quarter.  

Key Result Highlights

 The total revenue rose just 0.4% QoQ with gains from integration synergy already fully recognised by now. QoQ, the RM652.6m net interest income was down marginally -2.5% while loans grew 0.9% and NIM fell more than expected by 22bps. The result also delivered an uninspiring RM355m in noninterest incomes in 3Q12, rising just 6.4% QoQ.  

 However, cost has normalised in 3Q12 (becoming thus the only driver to earnings) and at RM448.5m, it declined a sharp 21% QoQ. This resulted in the cost-to-income ratio falling to 44.5% from 2Q12’s 56.3%.  

 Provision in 3Q12 is still running at sub-normal run rates at 3bps, allowing coverage to improve further to 149% with a 0.52% net impaired ratio.

 Chengdu Bank’s profit contribution meanwhile was higher at RM61m (2Q: RM35m).   

 Overall ROE remained steady at 17.1%.

Outlook   The combination of HLBANK and EON Bank has led to top line synergies.  Net interest margin has successfully improved but the 72% Loan-to-Deposit ratio against the backdrop of a competitive environment could signal peaking of NIM in the current quarter.  Hence, its merger synergy with EONCAP, which is expected to be value accretive, could have been fully exploited by the group by this quarter. We expect the enlarged group’s ROE to be lower at 16% in FY13 (post RM2.6b rights issue).  

Change to Forecasts

 We have fine-tuned our estimates and have raised our FY12 and FY13 net profit estimates by 10% and 1%, respectively, to RM1,609m and RM1,849m. 

Rating  MAINTAIN MARKET PERFORM

 Although the fundamentals of HLBANK are still good, its valuations are, however, not attractive at this juncture. The stock’s recent performance has already adequately priced in the integration synergies (on revenue and cost) in our view.  

Valuation    We are maintaining our TP at RM10.90 with an unchanged multiple of 1.7x the revised FY13 BV of RM6.42 (previously RM6.37) after our earnings estimates adjustment above.

Risks   An unexpected higher dividend payout could drive up valuation.  

Source: Kenanga