GLOBAL investment house UBS Investment Research believes Hong Leong Bank Bhd (HLB) is ready for a re-rating.
A UBS analyst said strong earnings recovery momentum and year-to-date (YTD) share price underperformance were possible drivers for a re-rating of HLB.
“With HLB's FY04 watershed year behind it, the bank should attract renewed investor interest, especially if it can sustain a sequential quarterly improvement in FY05, starting with its Q1 FY05 results, due in mid- to late November,” he said.
The analyst said HLB should be able to sustain a pre-provisioning profit of RM1bil to RM1.03bil per annum.
“We are forecasting a sharp rebound in FY05 earnings on the back of a projected 39% year-on-year decline in loan loss provisions, helped by a resumption in revenue growth,” he said.
The bank had recently filled two key positions, beefing up the treasury team, and continued its initiatives to convert its branches into marketing channels to enhance revenue growth prospects, he noted.
“HLB's risk-weighted capital ratio (RWCR) in FY05 should exceed 18%. Coupled with steady improvements in earnings, the bank should be able to sustain its track record of a 70% net dividend payout ratio,” he added.
The analyst said while HLB clearly had excess capital with its FY04 RWCR of 19%, capital management upside was not clear to UBS at this juncture.
The research house has raised its FY05 to FY07 dividend per share forecasts for HLB by 16%.
And HLB's FY05 price- to- earning ratio of 14.8 times is at a discount to that of its peers, except for RHB Capital Bhd.
The UBS analyst has recommended a “buy” on the stock, saying that there is room for its valuation discount to narrow.
He added: “The biggest risk to our positive stance on HLB is if the bank fails to sustain its recent turnaround in reviving loans growth and increasing its cross-selling capabilities as the primary sources of revenue growth. Our forecast rebound in HLB's FY05 profit is based on our projections of lower loan loss provisioning expenses after the hefty provisioning in H2 FY04.”
HLB shares had hit a high of RM5.90 and a low of RM4.30 over the last 12 months.
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