Hong Leong Bank - Further value from provision write-back under FRS139

-  We are maintaining our HOLD rating on Hong Leong Bank Bhd (HLBB), with a revised fair value of RM15.90/share (vs. RM15.30/share previously). Our fair value is based on a revised FY13F ROE of 15.2% (vs. 15.1% previously).  Fair P/BV is unchanged at 2.2x, but our fair value is now based on a higher book value of RM7.31/share (vs. RM7.13 previously) FY13F. 

-  We expect HLBB to reverse part of its collective assessment balance carried forward with the full adoption of FRS139 in its upcoming 1QFY13 result. Collective assessment rate (as a percentage of gross loans less individual assessment) for HLBB is currently 2.1%. We foresee this may be reduced to 1.6%, and have adjusted our forecasts accordingly for FY13F. This is expected to lead to a write-back of RM450mil to shareholders’ funds – a 3% or RM0.25/share increase in FY13F book value.  

-  In addition, a lower CA rate is also likely to lead to lower credit costs. Earlier, the company had guided that credit cost may be at 30bps for FY13F. But, a lower CA rate will also be applicable to new loans which means that the current year’s collective assessment expense will also be lower. Further, we understand that recoveries have been quite good in recent months. We have therefore revised our credit cost assumption to 22bps from 30bps FY13F.  

-  Given that the CA write-back would be allowed to be classified directly under shareholders’ funds, and consequently common equity, we estimate that this may boost HLBB’s common equity ratio by 50bps from 7.9% currently to 8.40%. We are now raising our dividend payout ratio forecast to 36% from 28%, leading to a higher GDPS of RM0.50 (from RM0.38) FY13F. 

-  Elsewhere, we expect annualised loans growth to be at the single-digit level in 1QFY13. This is slightly below the company’s target of 10% to 12%. The slower loans growth is in line with slower indicators from the banking industry statistics. Besides this, HLBB remains focussed on rebalancing part of its auto loans portfolio, which means that the auto loans growth will likely be impeded in the upcoming quarter. NIM is expected to continue to be under pressure although the company is maintaining NIM guidance of at least 2.00% for FY13F. 

-  We understand ROE target is around 15% to 17%, although the internal target is likely to be higher. All in, we forecast ROE to be relatively unchanged at 15.2%, although our fair value is now higher on account of a higher book value assumption (at RM7.31/share vs. RM7.13/share previously FY13) from the CA write-back. Despite our upgrade, our new fair value remains at less than 15% upside from the current level. Maintain HOLD.   

Source: AmeSecurities