Hong Leong Bank - Bolstered by one-off items HOLD

- We are maintaining our HOLD rating on Hong Leong Bank Bhd (HLBB), with an unchanged fair value of RM15.80/share. Our fair value is based on an ROE of 15.4% FY13F and a fair P/BV of 2.2x.

- HLBB recorded a decent 6.4% QoQ growth in net earnings, which means that annualised net earnings came in 7.3% above our forecast and 6.1% above consensus net earnings of RM1,886mil. This came from stronger-than-expected investment and trading income and positive write-back in loan loss provisions.

- Topline growth is still relatively subdued, given that annualised loans growth came in at 5.3%, slower than the target of 10% to 12%. The muted growth was attributed to lower utilisation of trade financing facilities on account of a soft external environment. NIM was stable on a QoQ basis with good CASA growth and higher loan-to-deposit ratio.

- Non-interest income continued to be bolstered by investment and trading income, with higher gains from fixed income and interest rate derivatives.

- There continued to be loan loss provision write-backs in 2Q, similar to 1Q’s, due to good recoveries. Gross impaired loans eased off substantially by 6.5% QoQ in 2QFY13, with ongoing strong recoveries bringing gross impaired loans ratio to a new record low of 1.5% (1QFY13: 1.6%). Loan loss cover has strengthened further, to 139.2% in 2QFY13 from 1QFY13’s 134.3%.

- Group common equity Tier 1 (CET1) came in at 10.5%, while the bank entity’s CET1 was at 7.9% based on phase-in arrangements allowed under the new guidelines. Without the phase-in arrangements, we estimate group CET1 at 8.3% and bank entity CET1 at 6.8% (before dividend).

- HLBB’s 2QFY13 surprised in terms of much lower-thanexpected loan loss provisions, as well as a stronger investment and trading income, similar to 1Q’s results. The sustainability of both of these items would be key to a significant upgrade in earnings.

- Meanwhile, we believe HLBB’s share price will be sustained on further evidence of:- (a) stronger-thanexpected topline loans growth; (b) evidence of revenue synergy for its fee-based income from its an expanded customer base; and (c) continued improvement in asset quality.

Source: AmeSecurities