We recently met up with Hong Leong Bank (HLBank)’s management, which remains cautious on the group’s overall growth outlook amid increasing risk aversion. Given its immediate focus on managing costs and sustaining balancesheet liquidity rather than aggressively driving growth, its immediate term earnings growth is unlikely to materially surprise on the upside. Efforts to realize meaningful revenue synergy are now likely to unfold over a longer horizon up to 2015, while its immediate term ROE may dip a tad below management’s target of 16%-17% for FY13. We maintain our NEUTRAL call and RM14.57 FV (2.1x FY13 PBV, ROE: 15.8%).
Loans growth likely to stay below industry average. Management remains mindful of the overall macro headwinds and is likely to retain its cautious stance well into FY13. Note that the FY12 loans growth of 7.8% was well below the industry’s 13% average, partially attributed to the group intentionally slowing down its auto loans growth as part of a portfolio rebalancing strategy. Moving forward, the drive for loans growth is likely to come from the mortgage and SME loans segments, with management retaining its overall group loans growth targets at 7% to 8% respectively for FY13. Given the rather lacklustre growth and continued net interest margin (NIM) pressure, we believe that the group’s net interest income growth is likely to remain pedestrian.
Focus on maintaining liquidity. Management had earlier guided for an optimal loan to deposit ratio (LDR) of 76%. However, given the tighter industry liquidity and growing aversion to risk, management remains very focused on maintaining its current liquid balance sheet position and its LDR at 71.6%. In fact, following the completion its acquisition of EON Cap, the group’s LDR had declined from 74% to 71%. As such, the group is unlikely to achieve balance sheet optimization by allowing loans growth to outpace that of deposits in the foreseeable future, which would thus cap any NIM upside.
Overall asset quality solid. In terms of asset quality, the group has fared relatively well in: i) raising the loans loss coverage to 158% from 149% in 3Q12, and ii) successfully managing credit quality despite having inherited more inferior credit quality from EON Cap’s portfolio. This was reflected in the impressive 10.9% q-o-q decline in absolute impaired loans, which gave rise to an improvement in the gross impaired loans ratio to 1.7% from 3Q12’s 2.0%. Management has indicated that despite the currently challenging economic backdrop, asset quality of the inherited auto and SME portfolio from EON Capital remains sturdy.
Loans growth likely to stay below industry average. Management remains mindful of the overall macro headwinds and is likely to retain its cautious stance well into FY13. Note that the FY12 loans growth of 7.8% was well below the industry’s 13% average, partially attributed to the group intentionally slowing down its auto loans growth as part of a portfolio rebalancing strategy. Moving forward, the drive for loans growth is likely to come from the mortgage and SME loans segments, with management retaining its overall group loans growth targets at 7% to 8% respectively for FY13. Given the rather lacklustre growth and continued net interest margin (NIM) pressure, we believe that the group’s net interest income growth is likely to remain pedestrian.
Focus on maintaining liquidity. Management had earlier guided for an optimal loan to deposit ratio (LDR) of 76%. However, given the tighter industry liquidity and growing aversion to risk, management remains very focused on maintaining its current liquid balance sheet position and its LDR at 71.6%. In fact, following the completion its acquisition of EON Cap, the group’s LDR had declined from 74% to 71%. As such, the group is unlikely to achieve balance sheet optimization by allowing loans growth to outpace that of deposits in the foreseeable future, which would thus cap any NIM upside.
Overall asset quality solid. In terms of asset quality, the group has fared relatively well in: i) raising the loans loss coverage to 158% from 149% in 3Q12, and ii) successfully managing credit quality despite having inherited more inferior credit quality from EON Cap’s portfolio. This was reflected in the impressive 10.9% q-o-q decline in absolute impaired loans, which gave rise to an improvement in the gross impaired loans ratio to 1.7% from 3Q12’s 2.0%. Management has indicated that despite the currently challenging economic backdrop, asset quality of the inherited auto and SME portfolio from EON Capital remains sturdy.
FRS139 write-back skewed towards the higher end. Similar to Public Bank, HLBank is likely to benefit from lower collective allowance (CA) provisioning upon full adoption of FRS139 given the group’s excess loans loss cover of over 158% and the second lowest non-performing loan (NPL) ratio in the industry after Public Bank. With its current collective assessment provisioning hovering at 2.1%, which is significantly above Public Bank’s post-FRS139 0.8% level, there is certainly great scope to snip its CA provisions closer to 1.0%-1.6%. Although the group has not disclosed the exact quantum given that this is pending Bank Negara Malaysia (BNM) approval, management indicates that using Public Bank as a benchmark, the potential quantum of excess CA to be written back is likely to skew towards the higher end of estimates. For the purpose of calculations, we are using 1.3% as a potential base-case scenario vs the current 2.1% level, which prospectively gives rise to a one-off excess after-tax CA write-back of RM543m and a core Tier 1 equity (CTE1) capital ratio enhancement of 50bps to 8.6% at group level.
Addressing capital concerns. There have been concerns that the group’s borderline 8.1% CTE1 ratios could potentially result in capital raising overhang if BNM were to impose the maximum 2.5% counter cyclical buffer over and above the minimum 7.0% Basel III CET1 ratio. However, as shown in Figure 2 below, even with our estimates of a one-off excess CA write-back of RM543.3m and an annual dividend payout ratio cap of 40%, the group would still be able to meet the most stringent minimum CET1 capital ratio of 9.5% by FY18. This is further based on assumption of a sustainable 11% Risk Weighted Asset growth p.a. As such, we do not see the potential of a capital raising overhang as a major risk, unless BNM imposed a total minimum CET1 ratio of above 9.5%.
Source: OSK
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