Hong Leong Bank - No major uplift to earnings expected in the short-term HOLD

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

- We expect HLBB’s loans growth to remain in the single digit range of 6% to 7%, which is lower than the group’s target of 10% to 12%. Our forecast for FY13F is 9.4%. We expect HLBB’s business loans to be slow, given that macro exports trend was generally soft in the December quarter.

- We believe recoveries of impaired loans have still been quite good in recent weeks. Recall that HLBB recorded a loan loss positive write-back of RM14.7mil in its recent 1QFY13, attributed to good recovery efforts on a few significant accounts. The main reason for better recoveries was its increased focus on this area, given less distraction from merger integration work, which is now coming towards the tail-end. 

- Normalised credit cost without recoveries is expected to range between 35bps and 40bps. We have forecast 22bps on average for FY13F and are maintaining our forecasts.

- Elsewhere, there remains no sign of strains on its loan portfolio. This is primarily due to the already cautious stance adopted by most of its business borrowers more than a year ago, leading to scaled-down stock inventories

- The common equity ratio (CET1) for the banking entity level for HLBB is estimated at 6%, which is lower than the group’s 8%. As such, we believe there may be a possibility of a rights issue in 2016, when the regulators set  a counter-cyclical buffer ratio. 

- The mitigating factor is that an every 1ppt increase in the CET1, at the bank entity level, requires a relatively digestable amount of RM850mil. In addition, while HLBB does not have a formal dividend policy, we expect it to maintain its dividend payout of about one-third of its net earnings base. Thus, while the bank entity’s CET1 is one of the lowest among all banks, we do not believe it will pose a major concern in the short term.  

- We expect the upcoming quarter to be relatively soft in terms of topline growth, while the strong recovery trend seen in its 1Q may likely continue into its 2Q.  Maintain HOLD on HLBB. HLBB’s share price performed well over the past one year and the recent fall is in-line with general market trend. While recovery efforts may uplift earnings in the short term, this is already in line with our forecast for credit cost.  

Source: AmeSecurities