In its research note issued on Wednesday, the research house said Hong Leong Bank’s management remains confident on its outlook, while acknowledging that challenging times lie ahead.
“The bank’s solid asset quality and robust capital position, coupled with a steady dividend profile, make it an attractive defensive play within the sector. As its share price has retracted by 20% YTD, the stock is trading at 1.24 times FY20F price to book value (P/BV) vs its historical mean of 1.5 times,” it said.
RHB Research said the bank’s management indicated that the mortgage pipeline remains healthy, with the approval rate stable at c.73%, and should be able to sustain FY20’s growth rate at a high single digit.
Apart from this, retail unsecured loans (personal financing and credit cards) are also an area of focus, where HL Bank is seeing good traction, namely in credit cards.
SME lending continues to be another key growth diver. The bank is looking to further penetrate into its existing SME accounts by tapping into the clients’ supply chain and expanding offerings to address their needs.
“Management remains upbeat about the SME segment’s outlook and asset quality, stating that most of the SME clients are in retail and wholesale segments, which are more domestic-oriented,” it said.
RHB Research also said it expects sequential recovery in 1QFY20 net interest margins (NIM).
In 4QFY19, NIM fell 11bps QoQ to 1.89% on the lower overnight policy rate (OPR).
“Management is targeting NIM of 2% for FY20 as deposit re-pricing approaches an end, barring any further OPR cut by Bank Negara.
“The bank’s decision to allow the loan deposit ratio (LDR) to drift closer to 85% (from 82%) is another mitigating factor. Management also noted that funding cost pressure is subsiding, as most banks have met the net stable funding ratio (NFSR) requirement set by Bank Negara. Its full-year NIM would be clipped by two to three bps, should another 25bps OPR cut materialise.
“Management remains confident on asset quality and sees no systematic risks in the bank’s portfolio. Gross impaired loan (GIL) ratio stood at a low 0.78% for FY19, and management is expecting it to remain below 1% in FY20. Net credit cost is expected to be 10-12bps for FY20.
“We make no changes to our FY20F-21F earnings. Hong Leong Bank’s relatively stable ROE trajectory and solid asset quality are preferred, given the slower economic growth. Our TP of RM18.70 is based on a Gordon Growth Model-derived P/BV of 1.4 times, below its historical mean of 1.5 times,” it said.
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