Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD
Research House: OSK
Hong Leong Bank Bhd
(Aug 20, RM 8.90)
Maintain trading buy at RM8.84 with target price raised to RM9.20: We are raising our target price for HLBB to RM9.20 from RM8.80 to factor in a higher price-to-book-value (PBV) multiplier of two times (implied 15.8% ROE) post earnings revision.
Although the share price upside from current levels is rather limited, we are maintaining our 'trading buy' recommendation as a successful merger with EONCap could see a re-rating of our fair value for HLBB to RM9.80 on the back of higher book value accretion and return on equity (ROE) of 16%.
HLBB's FY10 results (+9.1% y-o-y) were marginally above consensus and our expectations (+6.3% and +5.8% respectively). The strong 4QFY10 numbers (+51.1% year-on-year and +32.1% quarter-on-quarter) were underpinned by: (i) a pick-up in quarterly loans growth momentum (+3.5% q-o-q), (ii) effects of the OPR hike giving rise to higher NIMs (+11bps to 2.05%), (iii) lumpy writeback in specific allowance, which helped lower full-year credit costs to 27bps against FY2009's 44bps, and (iv) higher contribution from share of associate, Chengdu Bank (+103.4%).
Mitigating the upside were higher staff expenses (+6.7%) and forex income (-38.9%), which in turn resulted in a 14.1% y-o-y and 15.9% q-o-q decline in other operating income.
Compared with the 3QFY10 earnings, the group reported an 86.9% q-o-q drop in loan loss provision, largely due to a 97.3% surge in specific provision writeback. We think this is justified given the marked improvement in asset quality, whereby gross NPLs dipped 6.2% q-o-q and 9.2% y-o-y.
In addition, the group has been raising its general provisioning buffer in tandem with its robust loans growth and despite the lower overall provisions for the quarter, its loan loss cover rose to 117.4% from 116.1% q-o-q.
There was an encouraging sustained pick-up in HLBB's quarterly loans growth to a faster 3.5% rate in 4QFY10. This boosted gross loans growth to 8.4% y-o-y, which is still slightly below the industry average.
The bulk of the growth was from working capital (+21.7%) and mortgages (+13%) while hire purchase loans contracted 0.3%. Given the equally strong quarterly pick-up in deposit growth, its loans to deposit ratio remained stable at 54.1% but was up from FY2009's 51.5% as loans grew at a faster pace than deposits.
We are revising upwards our FY2011 and FY2012 earnings by 14.1% and 8.5% respectively, after tweaking higher our loans growth assumption to 9.5% and 8.2% for FY2011 and FY2012 against our original estimates of 7% and 7.5%, coupled with a lower credit cost of 30bps for FY2011. ' OSK Research, Aug 20
This article appeared in The Edge Financial Daily, August 23 2010.
Company Name: HONG LEONG BANK BHD
Research House: OSK
Hong Leong Bank Bhd
(Aug 20, RM 8.90)
Maintain trading buy at RM8.84 with target price raised to RM9.20: We are raising our target price for HLBB to RM9.20 from RM8.80 to factor in a higher price-to-book-value (PBV) multiplier of two times (implied 15.8% ROE) post earnings revision.
Although the share price upside from current levels is rather limited, we are maintaining our 'trading buy' recommendation as a successful merger with EONCap could see a re-rating of our fair value for HLBB to RM9.80 on the back of higher book value accretion and return on equity (ROE) of 16%.
HLBB's FY10 results (+9.1% y-o-y) were marginally above consensus and our expectations (+6.3% and +5.8% respectively). The strong 4QFY10 numbers (+51.1% year-on-year and +32.1% quarter-on-quarter) were underpinned by: (i) a pick-up in quarterly loans growth momentum (+3.5% q-o-q), (ii) effects of the OPR hike giving rise to higher NIMs (+11bps to 2.05%), (iii) lumpy writeback in specific allowance, which helped lower full-year credit costs to 27bps against FY2009's 44bps, and (iv) higher contribution from share of associate, Chengdu Bank (+103.4%).
Mitigating the upside were higher staff expenses (+6.7%) and forex income (-38.9%), which in turn resulted in a 14.1% y-o-y and 15.9% q-o-q decline in other operating income.
Compared with the 3QFY10 earnings, the group reported an 86.9% q-o-q drop in loan loss provision, largely due to a 97.3% surge in specific provision writeback. We think this is justified given the marked improvement in asset quality, whereby gross NPLs dipped 6.2% q-o-q and 9.2% y-o-y.
In addition, the group has been raising its general provisioning buffer in tandem with its robust loans growth and despite the lower overall provisions for the quarter, its loan loss cover rose to 117.4% from 116.1% q-o-q.
There was an encouraging sustained pick-up in HLBB's quarterly loans growth to a faster 3.5% rate in 4QFY10. This boosted gross loans growth to 8.4% y-o-y, which is still slightly below the industry average.
The bulk of the growth was from working capital (+21.7%) and mortgages (+13%) while hire purchase loans contracted 0.3%. Given the equally strong quarterly pick-up in deposit growth, its loans to deposit ratio remained stable at 54.1% but was up from FY2009's 51.5% as loans grew at a faster pace than deposits.
We are revising upwards our FY2011 and FY2012 earnings by 14.1% and 8.5% respectively, after tweaking higher our loans growth assumption to 9.5% and 8.2% for FY2011 and FY2012 against our original estimates of 7% and 7.5%, coupled with a lower credit cost of 30bps for FY2011. ' OSK Research, Aug 20
This article appeared in The Edge Financial Daily, August 23 2010.
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