Hong Leong Bank - Extraction of merger synergies well on track BUY

- We maintain BUY on Hong Leong Bank Bhd (HLBB), with a fair value of RM14.10/share. This is based on an adjusted (for rights) ROE of 15.6% FY12F, leading to a fair P/BV of 2.3x. 

- HLBB is now targeting a high-teen growth for its SME segment, which currently makes up 15% of its total loan book. With its expanded 330-branch network post merger, it remains on track to convert about 50 of these into new Community Business Banking Branches. 

- These are defined as branches serving SME businesses within close proximity to them. The identified targets are the traditional family-based businesses. We believe this represents new growth area for HLBB and indicates the company’s strong execution in terms of fully utilising its excess branch capacity following the merger. 

- In terms of recent loan demand trend from its exportsoriented customers, HLBB hinted that its business banking loan division has generally seen slower demand, due largely to its business borrowers adopting a more cautious stance. However, there is also an offsetting positive feedback from its domestic-oriented business borrowers, who are optimistic about rollout of  domestic Economic Transformation Programme (ETP)-related projects. HLBB is targeting an overall loans growth (excluding repayments) in the high single-digit levels. 

- HLBB alluded to gross impaired loans remaining benign so far. Its early-alert monitoring system, which allows the bank to monitor loan repayment and aging analysis, has not turned up any worrying trends for any particular segment of its loans portfolio. As for clean-up provisions, we understand these have already been largely provided for in 1HFY12. This was done through the harmonisation of collective and individual assessment policies with EON Bank’s. 

- Non-interest income is expected to normalise in the absence of marked-to-market losses related to interest rate swaps. For its fee-based income, we understand that its previous two quarters’ strong performance  in particular in relation to its credit cards segment is likely to be sustainable. 

- HLBB is well on track to realise further synergies  from the merger but we believe it remains under-appreciated for its strong execution track record to date. We remain positive on HLBB. Key catalysts are:- (a) a strongerthan-expected top line growth; (b) sustained asset quality, (c) seamless integration in its merger with EON Bank; (d) better-than-expected ROE of close to its internal target of 16% to 17%.

Source: AmeSecurities