KUALA LUMPUR: Maybank Investment Bank Research (Maybank IB Research) is positive on Hong Leong Bank’s fundamentals and it is raising the earnings forecast for the financial years 2018 and 2019 (FY18/FY19) by 2.5% and 3.1% respectively.
The research house on Tuesday said this was based on higher net interest margins (NIMs) estimates of 2.07% and 2.06% versus 2.03% and 2.04% previously.
It expected funding costs to be better managed as Hong Leong Bank increases its efforts to capture a market share of the small and medium enterprises (SME) financing market.
Maybank Research noted the worst appears to be over Hong Leong Bank's 20%-owned Bank of Chengdu (BOC) and expected BOC's share of group profit to improve marginally to 13% in FY18 from 12% in FY17 (versus a peak of 15% in FY15).
“With its share price having appreciated 17% year-to-date (YTD), the upside to our target price (TP) is now limited. While we continue to favour the bank’s strong fundamentals which include its impeccable asset quality, liquid balance sheet and a turnaround for BOC, valuations are fair at this stage, in our view.
“We raise our FY18/19 earnings forecasts by 2%-3% and our TP to RM15.90 from RM15.60," it added.
One of the key takeaways, the research house said from its meeting with the management of the bank was that the emphasis continues to be on driving SME lending.
The management, it said, hoped to roll out a more comprehensive transaction services system over the next couple of months to further attract such customers, while recruiting more relationship managers.
Maybank Research said the banking group management’s focus continues to be on driving its SME business, with SME financing up a decent 7.5% y-o-y as at end-March 2017. SME loans account for about 16% of Hong Leong Bank’s loan portfolio,
The research house believes that management should be able to hold NIMs at above 2.1%, at least in the near term.
It noted that the bank’s capital ratios are comfortable with end-March 2017 fully loaded common equity tier 1 (CET1) ratios of 12.1% and 11.6% at the group and bank entity respectively. The group’s preliminary assessment is of a 20%-25% increase in provisions once MFRS9 kicks in, in FY19.
Based on estimates, it noted that a 25% increase in provisions would shave off just about 20 basis points (bps) from the group’s CET1 ratio, which would be quite a manageable impact.
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