HONG LEONG - Maintain Buy by Citigroup
3QFY10 Results; Within Expectations
Maintain Sell, target price RM8.11 — We reiterate our Sell/Low Risk (3L) rating on Hong Leong Bank. 3QFY10 results were in line while sharp rebound in loan growth point to higher income in future quarters. No change in our earnings projections but in our view, HLBank’s current share price suggests that the market has already priced in the proposed EON Capital acquisition. Pegging HLBank’s proforma BV of RM4.71 at mid-cycle P/B of 1.8x, gives fair value of RM8.48.
3QFY10 net profit +1.4% QoQ, 9MFY10 -2.7% YoY — HLBank posted net profit of RM228m in 3QFY10 and RM686.9m for 9MFY10. This is 75% of our and consensus FY10E forecast of RM918m. ROAE of 14.8%, ROAA 1.12% and
BV/share RM4.28 as of 3QFY10.
Results continue to reflect effects of conservative lending stance — Net financing income (including Islamic banking) -4% QoQ but +1% for 9M10 due to sharp deceleration in loan growth between Dec 08 and Dec 09 (Fig. 2-3) and lower NIMs (-11bps QoQ; -13bps 9M10). Pretax profit -11% QoQ and -9% 9M10 on higher overhead expenses and loan provisions (+52% QoQ; +54% 9M10). Annualized credit cost was 38bps in 3Q10 and 60bps for 9M10. Profits from Bank of Chengdu stable at RM27m in 3QFY10 but +20% 9M10.
A positive development — Strong rebound in loan growth in 3Q10 (+3.2% QoQ; +8% YoY) on lending to the corporate and commercial segment (+11% QoQ; 21% YoY) and working capital loans (+10% QoQ; +25% YoY). This should see recovery in net financing income and NIMs with more productive deployment of deposits.
Balance sheet healthy — Gross NPLs +6% QoQ to RM775m, but gross NPL ratio remained low at 2.1% while LLR is a high 109%. Core capital and RWCR are robust at 15%.