Hong Leong Bank - Well-positioned for big dividend payout BUY

- We maintain BUY on Hong Leong Bank Bhd (HLBB), with a higher fair value of RM15.80/share (vs. RM14.10/share previously). We roll forward our valuation to FY13F, thus basing our fair value on an ROE of 15.7% FY13F vs. the previously adjusted (for rights) ROE of 15.6% FY12F. Fair P/BV is unchanged at 2.3x.  

- From our recent company visit, we understand that HLBB has scaled down its loans growth target to a high-single digit level, from the earlier target of 10% to 12%. This is not a major surprise though (our forecast: 6.9%), given there have been some deliberate efforts to scale down on the selected SME and auto segments. 

- The positive news is that existing business borrowers’ utilisation rate has remained generally stable. These borrowers had earlier adopted a more cautious stance in previous months and were generally holding less stock inventories in anticipation of slower end-consumer demand.

- We understand the gross impaired loans trend has remained stable recently, no major recent worrying signs. Thus, HLBB hinted that overall credit costs are likely to be less than 30bps to 40bps for FY12F, lower than earlier guidance of 30bps to 60bps. Given greater external uncertainty, the bank is likely to slow down credit growth to the higher-end property segment, selected construction segments as well as unsecured loans. 

- We understand there is still a substantial level of Section 108 tax credit that has yet to be utilised. We believe some of the plans being pondered upon to fully utilise this would be to either possibly adopt a dividend reinvestment plan (DRP) or possibly pay a special dividend. 

- We estimate HLBB’s hidden Section 108 tax credit implies a possible one-off special dividend of RM1.70/share, or net DPS of RM1.28. We believe this will be a major upside surprise, given that HLBB had only just begun to increase its interim GDPS, to RM0.11 recently from RM0.09 a year earlier, in its 1HFY12. Prior to this, HLBB had kept its GDPS unchanged at RM0.24 per annum, for eight consecutive years from FY04 to FY11. Assuming a special net DPS of RM1.28, we estimate HLFG’s portion to total RM1.5bil. HLBB’s core equity ratio is at 9% currently is well above the BASEL requirement of a minimum of 7% by 2019. 

- We maintain buy on HLBB. New catalysts for HLBB are:- (a) stronger-than-expected top line loan growth; (b) evidence of revenue synergy for its fee-based income; (c) sustained asset quality, (d) major dividend payout.

Source: AmeSecurities