KUALA LUMPUR: AmInvestment Research upgraded its call on HONG LEONG BANK BHD (HLBB) to a “buy” from “hold” with a revised fair value of RM18.90 a share from RM20.50.
It said the 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, ” said the research unit in its latest report.
HLBB recorded a flattish 4Q19 core net profit of RM636mil (+0.4% q-o-q) 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%y-o-y) after stripping out gains of RM90.1mil from the disposal of its 37% 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% y-o-y (3Q19: 6.5% y-o-y) 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 q-o-q to 1.89%. For 12M19, the group’s NIM declined 14bps y-o-y 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% y-o-y 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 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 q-o-q 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%) close to the estimated 51.9 sen a share, ” it said.
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