HLBANK (FV RM12.54 - NEUTRAL) 1HFY12 Results Review: Hit by Merger Expenses

Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD

Research House: OSK

Price Call: HOLD

Target Price: 12.54

The group is poised to capitalize on longer-term growthopportunities  with a largerpost-merger  organizational  footprint. However,  the slowing economic environment  in the medium term and HLBank's relativelyconservative culture could cap any immediate-term revenue upside synergies asalready reflected in its lower-than-expected loans and transactional fee incomegrowth. Despite our upward  FV  revision from RM12.15 to RM12.54 postearnings revision, we are downgrading our call to NEUTRAL from BUY, given theshare price's recent stellar run-up that outperformed the KLCI and KLFINindices by 5.1% and 5.7% respectively over the past 3 months. Downgrade to NEUTRAL from BUY and FV of RM12.54 (2.0x FY12 P/BV, 15.1%ROE).

In line. HLBank'sannualized 1HFY12 earnings were largely in line with both consensus and ourforecasts, representing 50.1% and 49.6% of the respective full-year estimates. 2QFY11 net profit declined 6.3%q-o-q, dragged down by a one-off RM114.6m voluntary separation payout andRM12.4m in other integration cost expense which raised overhead cost by 29.5%q-o-q. Despite the lumpy voluntary separation scheme (VSS payout), annualizedearnings were in line with expectations due to the positive offsetting effectsof higher write-back of individual allowance and impaired loans recovery(+40.2% q-o-q).  Excluding the RM127m intotal VSS and integration costs, annualized core 1HFY12 earnings came in 12.1%and 12.4% above our and consensus full-year earnings estimates, boosted bylower-than-expected loan loss provisions.

 

Lower provisions:Asset quality holds firm. The key positive takeaway was thelowerthan-expected loan loss provision, registering a net write-back of RM3.1mvs  a net provision expense of RM23.1m in 1QFY12.  A higher write-back of individual allowance and impaired loans recovery(+40.2% q-o-q) in the current quarter resulted in 1HFY12 annualized credit costcoming in at a significantly lower 4.5bps vs 1QFY12's annualized 10.8bps andour full-year estimate of 41bps. Overall impaired loans of the merged entity continuedto hold up well despite the economic slowdown, with absolute impaired loans declining1.5% q-o-q and thereby,  raising theoverall loan loss coverage to 141.9% from 1QFY12's 137.8%. This furtherunderpins  the  scope for provisions to surprise on the downsidein the subsequent quarters. We revise downwards our FY12 credit cost assumptionto 25bps and thus, raising our core FY12 earnings estimates by 5.7%.

Net interestmanagement. Effective asset liability management has allowed the group toexpand  on  its net interest margins (NIMs) by 11bpsq-o-q, despite the intense competition for retail deposits industry-wide.  The loans-to-deposit ratio remained at a comfortable72.9%, with management indicating a longer-term optimal target of 75% to 79%.

Source: OSK188