Hong Leong Bank - Solid Asset Quality

By OSK Research
29 Aug 2012

FY12 Results Review

The group reported FY12 results that were largely in line with both consensus and our full-year forecasts. The group is poised to capitalize on  longer-term growth opportunities, thanks to its larger post-merger organizational footprint. However, the slowing economic environment in the medium term and HLBank’s relatively conservative culture could cap any immediate-term revenue upside synergies, which is already reflected in its lower-than-expected loans and transactional fee income growth. Rolling forward our valuation to FY13, we raise our FV from RM12.54 to RM14.57 (2.1x FY13 PBV, ROE: 15.8%).


In line. HLBank’s  FY12 earnings were largely in  line with both consensus and our forecasts, representing 99.7% and 98.8% of the respective full-year estimates. Excluding the lumpy RM114.6m one-off VSS cost and RM2.6m initial integration cost recognized in  FY12, core earnings on a proforma comparison (i.e. assuming full contribution from EON Cap for FY11 period) grew 14.9% y-o-y, largely attributed to a 50% y-o-y decline in credit cost as a result of strong NPL recovery and well-managed NPLs coupled with improved operational cost efficiencies. Excluding the one-off VSS and integration cost, the group’s cost to income ratio improved to 44.9% in FY12 vs 46.1% in FY11, largely driven by merger Year 1 merger synergies amounting to RM200m.

Weakness in sequential performance. 4QFY12 net profit declined 15% q-o-q, weight down by 12bps q-o-q decline in NIMs and marked to market losses on financial derivative instruments of RM30.1m in 4Q12 vs a RM19.1m gain in 3Q12. As such, pre-provision operating profit declined 12.5% q-o-q. Provisions increased 173% q-o-q but were largely driven largely from higher collective assessment as a result of pick up in sequential loans growth momentum. With absolute gross impaired loans declining 10.9% q-o-q, the increase in collective assessment helped raise provision covers from 149% to 158% q-o-q.

Loans growth recovers but remains below industry trends. The group registered a sequential recovery in loans growth (+3.4% q-o-q)  vs 3Q12’s 0.9% q-o-q growth. However, despite the 4Q pick up, full year loans growth of 7.8% remains well below industry’s growth of 11%. Mortgages and Business loans performed favorably registering growth of 9.3% and 13.7% respectively, while auto loans as largely expected was rather uninspiring at 0.8%. One of the key focuses of its revenue synergy targets is greater emphasis on business and SME banking, with the allocation of up to 51 dedicated business banking branches.

Neutral
Price - RM13.50
Fair value- RM14.57

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