KUALA LUMPUR: AmInvestment Research upgraded its call on Hong Leong Bank (HLBB) to Buy from Hold with a revised fair value of RM18.90 a share from RM20.50.
It said on Thursday its fair value was based on a lower FY20 return on equity (ROE) of 10.2%, leading to a price-to-book (PB) value of 1.4 times.
“We see upside potential after the steep decline in its share price, with the stock now trading at a low 1.2 times FY20 PB, below its historical mean of 1.5 times. Our earnings for FY20/21 have been trimmed by 5.7%/3.5% to reflect higher CI ratio assumptions and to factor in another OPR cut of 25bps in 2H2019, ” it said.
HLBB recorded a flattish 4Q19 core net profit of RM636mil (+0.4% QoQ) with a subdued total income, coupled with higher operating expenses and provisions for loan impairments.
AmInvestment Research said core earnings for 12M19 of RM2.55bil (-1.8%YoY) after stripping out gains of RM90.1mil from the disposal of its 37.0% stake in Sichuan Jincheng Consumer Finance Ltd Company (JV Co) and RM25mil from sale of Visa shares came in within expectations, making up 95.8% of our and 94.0% of consensus estimates.
The ROE based on core net profit was 10.3% for 12M19 compared with its projection of 10.7%.
The group’s loans picked up pace with a higher growth of 6.6% YoY (3Q19: 6.5% YoY) vs. the industry’s 4.2% YoY.
Loan growth was supported by mortgages (residential property), HP, SME as well as overseas loans driven by Cambodia and Vietnam.
Net interest margins (NIM) in 4Q19 slipped 11bps QoQ to 1.89%. For 12M19, the group’s NIM declined 14bps YoY to 1.96%, attributed to higher funding cost coupled with the impact from the 25bps cut in OPR in May 2019.
AmInvestment Research also said operating expenditure was well controlled with only a marginal growth of 1.5% YoY in 12M19. CI ratio based on core total income was 45.4% for 12M19 (44.3% based on reported numbers).
“The 12M19 saw its 18.0% stake in Bank of Chengdu (BOC) and the remaining 12.0% in Sichuan Jincheng Consumer Finance Limited (now both associate companies) contributing a share of profit of RM563mil (+4.9%YoY), accounting for 17.7% of the group’s PBT (12M18: 16.5%).
“Stable impaired loans QoQ led to an improvement in GIL ratio to 0.78%. Net credit cost was 0.01% in 12M19 (12M18: 0.06%) due to lower provisions for expected losses. Excluding recoveries, 12M19 gross credit cost was 0.16%.
“ A final dividend of 34 sen/share has been declared, bringing the total dividends to 50 sen a share for FY19 (payout: 38.0%) close to the estimated 51.9 sen a share, ” it said.
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