HLBB’s FY13 results below expectation

by **Cals** Mon 02 Sep 2013, 14:00

HLBB’s FY13 results below expectation
Business & Markets 2013
Written by Alliance IB Research
Monday, 02 September 2013 13:22

HONG LEONG BANK BHD []
(Aug 30, RM14.10)
Upgrade to buy at RM13.70 with a revised target price of RM15.60 (from RM14.90): Hong Leong Bank (HLBB)’s 2013 financial year ended June 30 (FY13) came in below our and market expectations. Net earnings rose by 6.5% year-on-year (y-o-y) to RM1.86 billion, accounting for 95.1% of our and 96.7% of consensus’ estimates.

The earnings growth was mainly driven by: (i) 26.7% jump in non-interest income, supported mainly by higher treasury income; and (ii) significant cost synergies.

Nonetheless, the group’s y-o-y earnings growth was dragged down by normalisation of its credit cost — HLBB recorded a loan loss provision of RM41.4 million in FY13, compared with a loan loss reversal of RM14.8 million last year.

Gross loans grew by 7.3% y-o-y to RM97.2 billion, which came in below management’s and our target of 10%. The uninspiring loan growth was mainly dragged down by: (i) moderation in trade financing (8.4% y-o-y), although SME loans have picked up during the period (+20.5% y-o-y); (ii) flattish auto loans growth (+0.2% y-o-y); and (iii) contractions in both credit card (-3.4% y-o-y) and personal loan portfolios (-14.6%).

We understand that one factor dragging its loan growth momentum in FY13 was management’s focus on portfolio rebalancing given that there were portfolio overlaps between HLBB and the acquired EON Bank. With the completion of the exercise in FY13, we expect the group’s loan growth to revert to around the industry level. Management guided a loan growth target of 10% for FY14, which is in line with our forecasts.

Customer deposits were flattish at RM123.6 billion. The stronger growth rate in gross loans compared to customer deposits has increased its loan-to-deposit ratio (LDR) from 73.6% in fourth quarter (4Q) of FY12 to 78.6% in the first half (1H) of FY13. The below 80% LDR implies that the group continues to have room to expand its loan book.

Net interest margin (NIM) for FY13 dropped 17 basis points (bps) y-o-y to 2.13%. Nonetheless, we understand that the group continues to see downward pressure in NIM in FY14 due to: (i) asset replacement cycle; (ii) competitive product pricing; and (iii) potential uptick in cost of funding. We are forecasting the group’s FY14 NIM to contract by 12bps to 2.01%.

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Cost-to-income ratio improved from 49.6% in FY12 to 46.1%, driven mainly by ongoing cost optimisation initiatives to enhance productivity and efficiency of its operations.

Overall asset quality continues to improve as gross impaired loans ratio declined from 1.7% in FY12 to 1.4% in FY13. The full adoption of FRS 139 has resulted in the group’s loan loss coverage declining from 158% in FY12 to 131.2% in FY13, which remains strong and is the highest among banks under our coverage.

Capital adequacy ratios remain strong with common Tier-1 (CET1), Tier-1 capital and risk weighted capital ratio (RWCR) ratios at 10.2%, 11.9% (FY12: 11.6%) and 14.8% (FY12: 15.4%), respectively.

The group proposed a final net divided of 22.5 sen per share, which brings its full year net dividend per share (DPS) to 33.8 sen, representing a total payout ratio of 32%, which comes within our expectation.

We make no change to our earnings forecast. Nonetheless, we have increased our FY14 to FY15 DPS from 20 sen to 40 sen and 46 sen, respectively, reflecting the group’s commitment to a 33% dividend payout ratio going forward.

We roll over our valuation base to 2014 calendar year (from FY14 ending June) and raise our target price to RM15.60 from RM14.90. Our current target price implied a 1.8 times CY14 price-to-book and 15.7% return on equity based on our Gordon Growth Model.

In view of the rising global uncertainties, we find HLBB’s defensiveness increasingly appealing, in view of its: (i) low beta; (ii) superior asset quality, and (iii) domestic centric operations.

Furthermore, low foreign shareholding of about 8% could cushion the stock from heavy selldown in a risk-off environment while providing upside potential during a risk-on environment when foreign investors turn bullish on Malaysia. Upgrade to “buy”. — Alliance IB Research, Aug 30

This article first appeared in The Edge Financial Daily, on September 02, 2013.