PETALING JAYA: Hong Leong Bank Bhd, which is targeting a loan growth of about 6% for financial year(FY) 2021, expects its higher current account savings account (CASA) levels to translate to lower cost of funds in the coming quarters.
This bodes well for the group as it would improve its net interest margins (NIMs) and earnings in FY2021.
NIMs have been under pressure with a total of 125 basis points (bps) cuts last year.
NIM is a measure of the difference between interest income generated by banks and interest paid out to depositors. The average lending rate and the three-month fixed-deposit spread serves as a proxy for the banking sector’s NIM.
Kenanga Research said during the first half of FY 21 results release, the management has updated its FY21 NIMs target to be greater than 2% (versus our applied FY21 estimate: 1.8%).
It also posted a CASA-to-deposit ratio of about 30%. Based on a conference call, the research house said the management highlighted that CASA deposits are continuing to grow given customers’ appetite to hold cash which should translate to lower cost of funds in the coming quarters.
“This should support further expansion of NIMs. On the flipside, non-interest income (NOII) is expected to be buoyant as wealth management products are performing favourably with credit card transactions picking up in March with the loosening of movement controls.
“However, trading income suffered some setbacks due to less vibrant market conditions. “Making up for the lull in the first half of FY21, management looks towards increasing its marketing activities that coincide with the upcoming Hari Raya celebrations.
“That said, cost-to-in come ratio (CIR) is expected to remain in check, within the group’s guidance of less than 43% (versus our FY21 estimate: 39%, first half of FY21: 37.6%).
“Operationally, the growing adoption of digital mediums could also help to ease back-end costs, ” it added.
Hong Leong Bank has also been touted for having a light operating structure while also keeping its asset quality at high but sustainable levels (less than 1%).
Given these buffers, the research house said the group should have much leeway to navigate around potential worsening of market conditions.
The management, it noted, has also aspired to alleviate dividend payments back to its pre-Covid rate of close to 40% when conditions are favourable.
However, the research house is maintaining its “market perform” on the stock with a target price of RM17.60.
At current price level, it believes all positives have been fully priced in. At the same time, the group is dull in comparison to its peers in terms of dividend payments and could give little incentive to new investors.
“We recommend accumulation only on weakness when potential capital gains are more favourable, ” it added.