Hong Leong Bank is one of the most well-capitalised in the country

KUALA LUMPUR: Following the completion of its recent rights issue, Hong Leong Bank is now one of the most well-capitalised banks in the country, with its fully loaded CET1 ratio among the highest in the industry at 11.6%.

However, the bank continues to be weighed down by weaker-than-expected contributions from Bank of Chengdu (BOC). Excluding the one-off MSS cost of RM167mil, Hong Leong Bank’s second quarter for the financial year ending June 30, 2016 results were marginally below expectations, said Maybank IB Research in a note on Wednesday. 

First half of 2016 core net profit of RM1.01bil (-8% year-on-year) was 48% of its 12-month forecast and consensus’. But, net interest margin was stable quarter-on-quarter, while non-interest income expanded 35% year-on-year due mainly to forex gains. 

Asset quality remains strong but credit costs increased due to lower recoveries during the period. 

Maybank is positive on the fact that BOC’s asset quality stabilized quarter-on-quarter with a gross NPL ratio of 2.3% while loan loss coverage was adequate at 162%.

Meanwhile, management estimates MSS cost savings of about RM109mil per annum, but Maybank has factored only 80% of this in its forecasts. 

Taking into account the MSS cost and lower BOC earnings, its 2016 net profit forecast is cut by 10% but 2017/2018 earnings are trimmed by just 2-4% on factoring MSS cost savings of about RM90mil per annum. 

It maintains a Buy call on Hong Leong Bank with a revised target price of RM14.40 (-19 sen), pegged to a calendar year 2016 P/BV of 1.4x.