HLBANK (FV12.54 - NEUTRAL) Corporate News Flash: Firms Up Sale of MIMB

Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD

Research House: OSK

Price Call: HOLD

Target Price: 12.54

THE BUZZ

Hong Leong Bank (HLBank) has entered into a conditional saleand purchase agreement with Hong Leong Capital Bhd (HLCB) for the proposeddisposal of its entire equity interest in MIMB Investment Bank for RM157.9m.

OUR TAKE

No surprise. The disposal of MIMB to HLCB is not surprisingas the Hong Leong Financial Group (HLFG) is not allowed to hold more than onemerchant banking licence and HLFG has always intended to maintain itsinvestment banking business under HLCB in accordance with the group'sstructure. The RM157.9m pricing was based on 1x NTA of MIMB as at 31 July 2011,which we deem fair given MIMB's unappealing ROE and the fact that the sale maynot incorporate certain elements of MIMB's treasury books.

Leveraging on MIMB'sunutilized tax losses.  We believethat the proposed rationalization of HLCB's investment banking business underMIMB, via the transfer of the entire assets and liabilities of Hong LeongInvestment Bank to MIMB, will allow HLCB to benefit from MIMB's estimatedunutilized tax losses of RM1bn. This amount can be used to offset againstfuture taxable profit on its investment banking subsidiary.

No materialimpact  on  earnings. Given MIMB's lacklustreearnings track record and franchise with an  average  annual net profit ranging from RM2.3m toRM4.7m  over the past 3 years, the saleof MIMB is a sensible move as it will allow the group to free up excessresources and focus on its core commercial banking business.

Maintain NEUTRAL.The group is poised to capitalize on  the  longer term growth opportunities  in view of its larger post-mergerorganizational footprint. However, the slowing economic environment over themedium term and HLBank's relatively conservative culture could cap any immediate-termrevenue upside synergies, which are already reflected in itslower-than-expected loans and transaction fee income growth. Therefore, we aremaintaining our NEUTRAL recommendation and FV of RM12.54 (2.0x FY12 P/BV, 15.1%ROE).

Source: OSK188