Hong Leong Bank - Sprinting to a new core earnings level BUY

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

- HLBB net earnings was 4.3% above our estimate and 5.7% above consensus’ estimate of RM1,626mil. Core net earnings came in at RM465mil in this quarter; so this is close to our elevated expectations of RM470mil core net earnings per quarter. (Recall that the previous quarter’s net earnings of RM381mil was primarily affected by several one-off items, including a one-time provisioning for a full staff voluntary separation scheme of RM114.7mil). 

- Annualised loans growth was 5.5% in 3QFY12, which is lower than the earlier target of 10% to 12%. The company attributed this to efforts to reduce concentration and credit risks. This led to some lumpy project and lower quality credit loans being allowed to lapse. While loans growth was lower than expected, this was due to rebalancing efforts post the merger – thus we expect sanguine reaction. Nevertheless, the company remains upbeat on SME loans, with likely accelerated growth in the next 12 months, based on its new branch distribution network, as well as possible participation in certain ETP-related value chain loan activities. 

- The company reported a net interest margin (NIM) decline of 22bps QoQ in 3QFY12. This was due to emphasis on liquidity, as surplus funds were placed with other financial institutions and in high grade securities. The company hinted that it expects NIM to be maintained at current levels. Given likely higher deployment in terms of  SME loans, we expect NIM to be sustained. Non-interest income was stable, with seasonally slower (due to a short working quarter) fee income offset by better realised treasury forex gain. 

- Gross impaired loans continued to improve with the impaired loan balance further reduced by 1.9% QoQ. This sustained the gross impaired loans ratio at 2.0% in 3QFY12 from 2.0% in 2QFY12. Loan loss cover continued to climb, to a comfortable 149.0% in 3QFY12 (2QFY12: 141.9%).  

- The company’s annualised synergies remains unchanged at RM191mil (exceeding its target of RM180mil). Earnings performance is excellent with core net earnings now hitting a new level. This is especially in view of  the ongoing integration process, with single platform day integration just completed on 6 May 2012. Key catalysts are:- (a) stronger-than-expected top line growth; (b) sustained asset quality, (c) better-than-expected contribution from Bank of Chengdu, and (d) seamless integration in its merger with EON Bank; (e) likelihood of achieving close to its internal ROE target of 16% to 17%.   

Source: AmeSecurities