Hong Leong Bank - Undetected super strong core net earnings trend BUY

Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD

Research House: AMMB

Price Call: BUY

Target Price: 14.00

- We maintain BUY on Hong Leong Bank Bhd (HLBB), with ahigher fair value of RM14.10/share (from RM13.00 previously). This is based onan adjusted (for rights) ROE of 15.6% (from 14.7%) FY12F, leading to a fairP/BV of 2.3x (from 2.1x previously). 

- We believe HLBB's is underappreciated for its strong corenet earnings trend, which had remained undetected based on its latest reportedresults. To recap, HLBB reported a net earnings of only RM381mil  or a 6% decline on QoQ basis. 

- However, net earnings was affected by a few one-off items.First, non-interest income was still affected by RM32mil loss on its hedgecontracts. More importantly, this disguised the strong trajectory in allportions of its sustainable fee income, in particular its credit card fees. Creditcard related fees is estimated to have easily doubled from HLBB's pre-mergerlevels, and this is largely due to effective harvesting of HLBB's new numbertwo (from number 3 previously) ranking in terms of credit card positioning. Wehave upgraded our noninterest income substantially by 28% FY12F, and 20% respectivelyfor FY13F and FY14F.   

- Secondly, asset quality has turned out to be much better thanexpected. We understand that that there had been no worrying signs in terms ofthe merged entity's impaired loans level. We are also reassured there is closemonitoring of aging of loans going by days as part of its pre-emptivemonitoring process. Thus, we are now lowering our assumption for credit costsfor HLBB,  to 39bps (from 70bpspreviously) for FY12F, and 41bps (from 70bps previously) FY13F. The company'scredit costs guidance is 30bps to 60bps FY12F.  

- Third, overhead expenses was overstated by a significant38% in 2QFY12, based on the reported results which included one-off items such asthe VSS costs. But more importantly, even if we are to strip off the one-off items,we estimate normalised merged group's opex to be easily 4% lower than HLBB-EONBank's standalone basis and 5% below our estimates. We are thus reducing overalloverhead expense by 5% FY12F, 12% FY13F and14% FY14F.

- HLBB is well track to realise further synergies from this mergerbut we believe it remains underappreciated for its strong execution trackrecord to date. We remain positive on HLBB. Key catalysts for HLBB are:- (a) stronger-than-expectedtop line growth; (b) sustained asset quality, (c) seamless integration in itsmerger with EON Bank; (d) better-than-expected ROE of close to its internaltarget of 16% to 17%.

Source: AmeSecurities