Hong Leong Bank - Extraction of merger synergies well on track BUY

Stock Name: HLBANK
Company Name: HONG LEONG BANK BHD

Research House: AMMB

Price Call: BUY

Target Price: 14.10

- We maintain BUY on Hong Leong Bank Bhd (HLBB), with a fairvalue of RM14.10/share. This is based on an adjusted (for rights) ROE of 15.6%FY12F, leading to a fair P/BV of 2.3x. 

- HLBB is now targeting a high-teen growth for its SME segment,which currently makes up 15% of its total loan book. With its expanded330-branch network post merger, it remains on track to convert about 50 ofthese into new Community Business Banking Branches. 

- These are defined as branches serving SME businesses withinclose proximity to them. The identified targets are the traditionalfamily-based businesses. We believe this represents new growth area for HLBBand indicates the company's strong execution in terms of fully utilising its excessbranch capacity following the merger. 

- In terms of recent loan demand trend from itsexportsoriented customers, HLBB hinted that its business banking loan divisionhas generally seen slower demand, due largely to its business borrowersadopting a more cautious stance. However, there is also an offsetting positivefeedback from its domestic-oriented business borrowers, who are optimisticabout rollout of  domestic EconomicTransformation Programme (ETP)-related projects. HLBB is targeting an overallloans growth (excluding repayments) in the high single-digit levels. 

- HLBB alluded to gross impaired loans remaining benign sofar. Its early-alert monitoring system, which allows the bank to monitor loanrepayment and aging analysis, has not turned up any worrying trends for anyparticular segment of its loans portfolio. As for clean-up provisions, weunderstand these have already been largely provided for in 1HFY12. This wasdone through the harmonisation of collective and individual assessment policieswith EON Bank's. 

- Non-interest income is expected to normalise in the absenceof marked-to-market losses related to interest rate swaps. For its fee-basedincome, we understand that its previous two quarters' strong performance  in particular in relation to its credit cardssegment is likely to be sustainable. 

- HLBB is well on track to realise further synergies  from the merger but we believe it remainsunder-appreciated for its strong execution track record to date. We remain positiveon HLBB. Key catalysts are:- (a) a strongerthan-expected top line growth; (b)sustained asset quality, (c) seamless integration in its merger with EON Bank;(d) better-than-expected ROE of close to its internal target of 16% to 17%.

Source: AmeSecurities