- We maintain our HOLD rating on Hong Leong Bank Bhd (HLBB), with a new fair value of RM15.90/share (from RM15.80/share previously) as we roll forward our base year to FY14F from FY13. Our fair value is based on ROE of 14.5% FY14F (from 15.4% FY13F) and a lower fair P/BV of 2.0x (from 2.2x) arising from the lower ROE.

- HLBB posted a 8.3% QoQ decline in 4QFY13 net earnings, largely on the back of slower non-interest income. The full year FY13’s net earnings were in line with our forecasts but 2.6% short of consensus estimates.

- Gross loans growth was better at 2.9 % QoQ in 4QFY13, ahead of 3QFY13’s 1.6% QoQ increase. Total gross loans growth came in at 7.3% for FY13. Although this is lower than the company’s earlier target of 10% to 12%, the slower growth is not a major surprise given that HLBB had earlier reported muted annualised loans growth of only 5.7% in its 9MFY13.

- The higher QoQ growth was driven by the retail residential and non-residential mortgages as well as the working capital and construction segments. NIM was well sustained at above the 2% target, coming in at 2.13% for FY13.

- Investment and trading income declined by merely 23% QoQ, which is quite decent considering the volatility in the bonds market.

- Elsewhere, the fair value reserve related to its longerterm available-for-sale securities was RM163.1mil in 4QFY13, which is only about 20% lower than the reported RM204.4mil in 3QFY13. This is positive, indicating a fairly high buffer for its marked-to-market position of available-for-sale securities as at end-June 2013.

- HLBB’s FY13 net earnings were decent with loans growth picking up and non-interest income holding up well. Looking ahead, we expect loans growth to remain muted given the generally slower domestic growth environment. The company indicated that macro challenges would result in external liquidity outflow, with industry loans growth likely to be slower looking ahead. So far there have been no major issues with its asset quality, which has remained stable.

- Share price catalysts are likely to be:- (a) better SME loans and property loans growth, which are its focus growth areas; (b) improvement in asset quality; (b) further evidence of no adverse impact from investment and trading income; and (c) achievement of ROE of at least 15%; (e) better bank CET1 ratio.

Source: AmeSecurities