Hong Leong Bank Bhd (Dec 21, RM 10.54)
Maintain buy with fair value of RM12.33 from RM12.15: The group is well positioned post merger to capitalise on growth opportunities but we believe that the market may not have fully appreciated the revenue synergies that the larger organisational platform can potentially attain.
Maintain “buy” with a higher fair value of RM12.23, or 1.95 times FY12 price to book value (P/BV), based on the Gordon Growth model. This valuation is supported by 14.8% return on equity (ROE), 9.2% cost of capital (COE) and 4% long-term growth rate.
The key catalysts are: (i) a bigger-than-expected upside in revenue and operational synergy, (ii) more resilient-than-expected asset quality and (iii) stronger-than-expected growth from 20% associate Bank of Chengdu in China. The stock’s 1.6 times (P/BV) is compelling against ROE of 14% to 15%.
Management is now guiding for FY12 loan growth to come in at the lower end of its earlier 10% to 15% loan growth targets as macroeconomic uncertainties persist. The group’s recent 1Q12 quarter-on-quarter (q-o-q) loan growth grew by a relatively subdued 1.3%, or an annualised rate of just 5.2% partially weighed down by lumpy loan repayments.
As such, its earlier 10% to 15% loan growth guidance does look optimistic. We have correspondingly lowered our FY12 and FY13 loan growth targets from 13.6% and 14.1% to 9.7% and 13.1% respectively.
Current loan growth trajectory is largely driven by secured mortgage and non-residential properties but HLB intends to enhance its community SME business banking portfolio.
This is because its much larger branch network now allows the realignment of some of its branches to expand its reach to this market segment more aggressively which is also positive for longer-term lending yields.
EON Capital’s loan portfolio has been holding up stronger than expected with the merged entity’s absolute impaired loans declining 5% q-o-q in the recent quarter.
In fact, the actual additional impairment on EON Capital’s loans book as a consequence of harmonising with HLB’s more stringent impaired loan criteria only led to a RM30.9 million increase in impaired loans for EON Capital, which is small in relation to the RM673 million excess loan loss cover the group is currently sitting on.
We have consequently lowered our credit cost assumption for the group in FY12 and FY13 from 51 basis points (bps) and 42bps to 41bps and 35bps respectively. — OSK Research, Dec 21
This article appeared in The Edge Financial Daily, December 22, 2011.
Maintain buy with fair value of RM12.33 from RM12.15: The group is well positioned post merger to capitalise on growth opportunities but we believe that the market may not have fully appreciated the revenue synergies that the larger organisational platform can potentially attain.
Maintain “buy” with a higher fair value of RM12.23, or 1.95 times FY12 price to book value (P/BV), based on the Gordon Growth model. This valuation is supported by 14.8% return on equity (ROE), 9.2% cost of capital (COE) and 4% long-term growth rate.
The key catalysts are: (i) a bigger-than-expected upside in revenue and operational synergy, (ii) more resilient-than-expected asset quality and (iii) stronger-than-expected growth from 20% associate Bank of Chengdu in China. The stock’s 1.6 times (P/BV) is compelling against ROE of 14% to 15%.
Management is now guiding for FY12 loan growth to come in at the lower end of its earlier 10% to 15% loan growth targets as macroeconomic uncertainties persist. The group’s recent 1Q12 quarter-on-quarter (q-o-q) loan growth grew by a relatively subdued 1.3%, or an annualised rate of just 5.2% partially weighed down by lumpy loan repayments.
As such, its earlier 10% to 15% loan growth guidance does look optimistic. We have correspondingly lowered our FY12 and FY13 loan growth targets from 13.6% and 14.1% to 9.7% and 13.1% respectively.
Current loan growth trajectory is largely driven by secured mortgage and non-residential properties but HLB intends to enhance its community SME business banking portfolio.
This is because its much larger branch network now allows the realignment of some of its branches to expand its reach to this market segment more aggressively which is also positive for longer-term lending yields.
EON Capital’s loan portfolio has been holding up stronger than expected with the merged entity’s absolute impaired loans declining 5% q-o-q in the recent quarter.
In fact, the actual additional impairment on EON Capital’s loans book as a consequence of harmonising with HLB’s more stringent impaired loan criteria only led to a RM30.9 million increase in impaired loans for EON Capital, which is small in relation to the RM673 million excess loan loss cover the group is currently sitting on.
We have consequently lowered our credit cost assumption for the group in FY12 and FY13 from 51 basis points (bps) and 42bps to 41bps and 35bps respectively. — OSK Research, Dec 21
This article appeared in The Edge Financial Daily, December 22, 2011.
