- We are maintaining our HOLD rating on Hong Leong Bank Bhd (HLBB), with an unchanged fair value of RM15.80/share. Our fair value is based on an ROE of 15.4% FY13F and a fair P/BV of 2.2x.

- There was a strong earthquake measuring 6.6-7.0 magnitude which struck in Lushan county, near the city of Ya’an in the southwestern province of Sichuan over the weekend. China’s Ministry of Civil Affairs put the number of dead at 184 and missing at 24, with more than 11,000 injured.

- The quake struck just after 8am local time Saturday, about 115 kilometres (71 miles) from the provincial capital, Chengdu, at a depth of around 12 kilometres, according to the US Geological Survey.

- The earthquake is close to the 2008 Great Sichuan earthquake, which measured 8.0 magnitude, and whichstruck at Wenchuan County, about 80km west-northwest of Chengdu. For the 2008 earthquake, official figures stated that 69,197 were confirmed dead, including 68,636 in Sichuan province, and 374,176 injured, with 18,222 listed as missing. The earthquake left about 4.8 million people homeless.

- For Hong Leong Bank’s 20%-owned associate Bank of Chengdu Co Ltd (Bank of Chengdu), we expect some infrastructure damages to some of its 120 bank branches in Sichuan. We understand the company is in initial stages of estimating the damages to the branches. However, given that the earthquake is a little more than 100km away from, we expect minimal damage to most of Chengdu’s branches. We estimate Bank of Chengdu to contribute 12% to group pre-tax profit for FY13F.

- In terms of possible impact to asset quality, we expect this to be minimal. This is because about 30% of Bank of Chengdu’s loans are extended to state-owned enterprises, while 20% are extended to the retail segment. The remaining are mostly to the corporate segment. We believe smaller business loans may be more affected, but we believe Bank of Chengdu has little exposure to small business loans currently.

- To recap, there was not much financial impact to Bank of Chengdu in the aftermath of the 2008 earthquake, with net earnings for Bank of Chengdu rising to RMB 1bil in FY09 from RMB750mil in FY08. Gross NPL ratio dropped to 1.5% in FY09 from 3.7% in FY08.

- We expect HLBB’s share price to be sustained given its strong asset quality. For the upcoming quarter results, we expect topline growth to be soft, given cautious business sentiment ahead of the domestic general election.

Source: AmeSecurities