KUALA LUMPUR: Hong Leong Bank’s earnings in the first half ended Dec 31, 2016 (1HFY6/17) were in line with CIMB Equities Research and market’s expectations but the valuations have started to look pricey.
The research house said on Wednesday Hong Leong Bank’s earnings were at 48% of its and Bloomberg consensus full-year forecasts.
However, its valuations were much higher at CY17F price-to-earnings (P/E) of 12.4 times vs. the sector’s 12 times.
It said the banking group’s 1HFY6/17 net profit surged 29%, mainly due to the absence of the one-off mutual separation scheme (MSS) costs of RM172mil booked in 2QFY16.
Adjusting for the MSS cost, net profit would still have expanded at a healthy rate of 11.7% on-year in 1HFY17.
“Loan growth recovered from 4% on-year at end-September 2016 to 4.6% on-year at end-December 2016. Gross impaired loan ratio inched up from 0.84% at September 2016 to 0.86% at end-December 2016.
“Maintain Reduce due to unattractive valuation and expected upturn in credit cost,” it said.
CIMB Research said the 15 sen interim net dividend per share declared was also within its expectation.
It retained its FY17-19 earnings per share (EPS) forecasts and dividend discount model-based target price of RM12.10.
Commenting on the results, CIMB Research said while Hong Leong Bank performed well in Malaysia, the earnings contribution from its associate company in China, Bank of Chengdu dwindled by about 10.1% on-year in 1HFY17.
“According to management, this was mainly due to higher loan loss provisioning in 2QFY17. While management expects a mild improvement in BOC’s earnings in 2017, we think the road to recovery would be bumpy considering the economic slowdown in China,” it said.
Loan growth improved from 4% on-year at September 2016 to 4.6% on-year at end-December 2016, but still below the industry’s 5.3%.
The stronger overall loan growth was due to the smaller contraction of 1% on-year in working capital loan at end-December 2016, vs. a drop of 6.8% on-year at end September 2016.
Conversely, the growth momentum for residential mortgages eased from 12.1% on-year while auto loans shrank 1.7% on-year vs. an increase of 0.5% on-year at end September 2016.
“The bank’s gross impaired loan ratio inched up from 0.84% at September 2016 to 0.86% at
end December 2016. Although loan loss coverage declined from 112.6% as at September 2016, it remained strong at 106.8% at end-December 2016.
“Hong Leong Bank remains a Reduce given the potential de-rating catalysts of (1) lower contribution from Bank Of Chengdu, (2) an expected upturn in the credit-cost cycle, and (3) unattractive valuations – CY17F price-to-earnings (P/E) of 12.4 times vs. the sector’s 12 times.
“We prefer RHB Bank for exposure to mid-sized Malaysian banks. The upside risks to our call are faster-than-expected recovery in contributions from Bank of Chengdu and upturn in loan growth,” CIMB Research said.
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