RHB Research upgrades Hong Leong Bank to Buy

KUALA LUMPUR: RHB Research upgrades Hong Leong Bank from Sell to Buy with revised target price of RM15.70 from RM12. 

It said on Tuesday that it expects the share price, which has underperformed the sector’s 15% year-to-date rise, to re-rate, supported by the recovery in Bank of Chengdu’s (BOC) profitability, improved net interest margins (NIM) and increased efficiency. 

The research house said the returns on equity (ROEs) are forecast to gradually rise to 10.3% by FY19F.

RHB Research said Hong Leong Bank posted net profit of RM570mil (+4% quarter-on-quarter) for 3QFY17 (June) and RM1,662mil (+24% year-on-year) for 9MFY17. 

“Excluding mandatory separation scheme (MSS) costs of RM172mil in 2QFY16, 9MFY17 earnings were up 13% year-on-year. Its 9MFY17 earnings were 76%-77% of consensus and our FY17 forecasts. Annualised ROE was 10.4% vs management’s FY17 target of 10-11%.

“For 3QFY17, net profit growth was led by its 20%-owned BOC, with contributions up 2.6 times quarter-on-quarter to RM118m. PIOP fell 8% quarter-on-quarter on a 22% quarter-on-quarter fall in non-interest income,” it said. 

For 9MFY17, earnings uplift came from NIM expansion of 14bps Year-on-year (reported), a 2.2 times jump in investment income and controlled expense growth. CIR improved to 43.9% (9MFY16: 45.9% excluding MSS). 

It also helped that impairment losses were stable at RM97mil while BOC’s contributions were up 4% year-on-year.

Gross loans grew 4% year-on-year vs system’s 6% year-on-year growth and management’s targeted growth of 4-5%. HL Bank’s share of the domestic loan market slipped to 7.7% (Jun 2016: 7.9%). 

Healthy growth in housing (+11% year-on-year) and small and medium enterprise (SME) (+7.5% year-on-year) loans was partially offset by repayment of several corporate loans. 

Deposits growth kept pace (+4% year-on-year), maintaining loan deposit rates at a comfortable 80.3%. Current account and savings accounts (CASA) deposits grew 9% year-on-year, nudging CASA ratio to 25.5% (Jun 2016: 25.0%). 

“Management believes its loan growth target is still within reach, but sees NIM being toppish at 2.14%.

“Rise in GILs moderated to 2.4% quarter-on-quarter (2QFY17: +4.6% quarter-on-quarter), with no significant asset quality stress detected. GIL ratio stayed low at 0.88% while LLC ratio was a healthy 105.6% (including regulatory reserves: 165%). 

“Annualised credit cost was a higher 15bps in 3QFY17 (2QFY17: 9bps), which management believes is a normalised level.

“After being hit by high loan provisions since 1QFY16, profits from BOC have recovered to levels seen in 2HFY15.

“Management expects steady performance at BOC as asset quality stabilise and the bank takes a cautious approach to growing its SME loans.

“Taking into account the rebound in BOC’s profitability and the resilience seen in its asset quality, we raised our FY17F-19F earnings by 2.5-5%. 

“Our TP is higher at RM15.70 (from RM12), after rolling forward our valuation to FY18 and our Gordon Growth Model-derived price-to-book value revised to 1.32 times supported by higher ROE of 10.3% and lower cost of equity of 8.9%. Target 1.32 times price-to-book value is in line with those of peers with similar ROEs,” it said.