Hong Leong Bank - Expecting a strong start for FY13

HLBANK’s 1Q13 earnings are expected to be strong on a QoQ basis, driven by a likely 10%-12% QoQ revenue growth and low credit cost.  A particularly difficult margin environment is likely to remain, however. In addition, going by our anticipated 3% QoQ growth (or +13% YoY) in loans book, its interest income growth is likely to remain unexciting. That  said, low teens QoQ growth in its non-interest income will likely result in an overall strong performance.  We expect the overall upcoming 1Q13 earnings to likely come in within the consensus and our expectations. We have raised our TP to RM15.20 based on a higher targeted multiple of 2.0x BV (1.9x previously) as we feel investors are willing to pay a premium for  visibility. Note that we have also rolled forward our valuation year to FY14.  

Despite the rise in TP, we are maintaining our MARKET PERFORM rating on Hong Leong Bank (“HLBANK”). After a strong rally in the past one month (+10.8%), we believe that the market has priced in its strong earnings growth above. At our target price, the stock will be trading at 13.0x PER.

HLBANK is due to report its 1Q13 results in the middle of this month.  The results should show a low-teen QoQ revenue growth in the range of 10%-12%. A particularly difficult margin environment is likely to offset the benefits from our anticipated 3% QoQ (or +7% YoY) forecast loan growth. We are expecting a lower NIM  for the quarter at 1.70%, -2bps QoQ, as price competition has gotten more intense during the quarter on both the asset (particularly on loan) as well as liability (or customer deposit) sides. 

However, we are expecting a strong growth in its non-interest income that will drive the out-performance. We are also seeing the positive impact from its merger synergies. As such, we expect the group  to register a profit after tax of RM469m in 1Q13, which will be 19% higher than 4Q12’s RM395m. The strong rise will also be due to a likely lower credit cost at 9bps (on an annualised basis) vs. FY12’s 35bps.  

Rises in costs are likely to be muted as the group  has a strong cost management. Together with a strong revenue growth, we see a lower operating cost with a 45% cost-to-income ratio. In summary, the 1Q13 PAT (expected at RM469m) should be within ours and  the street’s estimates.  

We have raised our TP to RM15.20 (from RM13.00 previously) on a higher multiple of 2.0x (from 1.9x previously) on its FY14 BV of RM7.65. Note that we have also rolled forward our valuation base year to FY14.

Rating is maintained.  The improved outlook is likely one of the reasons for the strong share price performance of the stock over the last month. However, after the strong rally (+10.8%), we believe that the market has priced in its better prospect above. HLBANK is the best performing Malaysian bank YTD in terms of share price performance. At the current share price level, the stock only offers a 5.6% upside to our new target price. Coupled with the projected dividend yield of 2.4%, the stock still offers <10% total return, hence MARKET PERFORM.

Source: Kenanga