Hong Leong Bank - Strong start already priced in?

Period  1H13

Actual vs. Expectations    The 1H13 PAT of RM985.6m was within the consensus expectation (52%) and that of our estimate (52%). The robust 2Q12 PAT jump of RM508m (+6.4% QoQ, +45.5% YoY) was due to another impaired asset recovery booked in the quarter, a low effective tax rate of 20% and adjustment of FY12 reported figures on the new MFRS standard.

Dividends  The group has declared an interim dividend of 15.0 sen per share (less income tax of 25%).

Key Result Highlights  The results showed a flat or 0.2% QoQ revenue growth.

 Loans growth of 7% YoY was below the industry of 11% and that of ours 10% estimate.

 The net interest income came in at RM616.6m, which was down marginally by 1.3% QoQ. The decline was due to the fall in the NIM by 1bps in 1Q13 to 2.12% (vs. 1Q12’s 2.13%, FY12’s 2.31%). A re-pricing of the loan portfolio has compressed margin and offset the benefit of its 1.3% QoQ (or +7.0% YoY) loan growth.

 However, the result saw an inspiring 2.7% QoQ and 18.7% YoY increase in non-interest incomes to RM388.8m due mainly to higher gains from treasury operation.

 Fortunately, the cost at RM451.6m was up only moderately by 2.0% QoQ due to the strong cost management initiatives that extracted efficiencies and synergies. This resulted in a cost-to-income ratio of 45.0% (1Q13: 44.2%), which was within expectation.

 Meanwhile, with the adoption of MFRS139 and proactive credit recovery efforts, the net impaired ratio improved further to 1.49% (from 1.61% in 1Q13). While the loan loss coverage ratio declined to 139%, we still expect the sub-normal credit cost to continue until the year-end.

 Chengdu Bank’s profit contribution meanwhile was higher at RM69m (vs. 4Q12: RM59m).

 The overall ROE remained steady at 16.4% and was within our expectation.

Outlook  We are also seeing the positive impact from its merger synergies. Apart from the low-teens top line growth, say ~12%, the bottom line growth will be further boosted to mid-teens, say ~16% YoY due to a lower credit cost.

Change to Forecasts  There are no changes to our earnings estimates.

Rating   Maintain MARKET PERFORM.

 At the current share price level, the stock only offers a 5.1% upside to our target price. Together with the projected dividend yield of 2.6%, the stock offers less than a 10% total return and hence, we are maintaining our MARKET PERFORM rating.

Valuation  Our TP is maintained at RM15.20, representing a 2.0x valuation of its FY14 BV of RM7.65.

Risks  An unexpected higher dividend payout could drive up its valuation.

Source: Kenanga