- At our recent company visit, Hong Leong Bank (HLBB) indicated that it is recalibrating its SME segment to include possible new growth areas. These may include community-based SME lending from retail branches as well as a new program lending.

- The possible new community-based SME lending from retail branches may differ from those offered by its existing 50-odd business banking centres that started two years ago following its merger with EON Bank. The main difference is that these may likely to be spearheaded by the retail branches, rather than the larger business centres. In addition, HLBB believes there are under-penetrated SMEs in the services, hospital and education segments.

- As for program lending, these may be targeted at standard products required by SME customers, with the main difference being lesser requirement for assessment by the credit committee. This may lead to a faster turnaround time for approval. We believe the new proposals for SMEs growth are still in the early stages of internal consideration.

- As for the retail segments, HLBB indicated that it is now looking at building back its auto loans growth, following the rebalancing of its auto loans portfolio. Overall, HLBB is maintaining its targeted loans growth of at least 10% for FY14F (Our forecasts: 5%).

- In addition, HLBB further alluded to a new and higher loan-to-deposit ratio (LDR) target of 80% by end-FY14F (FY13: 78.6%), which is positive given its low LDR in the past.

- As for the non-interest income segment, HLBB sees transactional banking; forex and global transfer services; cash management services; and wealth management products as new possible areas of growth. Fee income ratio target is maintained at 26% to 28% for FY14F, higher than our forecast of 24%, given the minimal marked-to-market losses from its securities held-for-trading portfolio as these are mostly short duration papers.

- Asset quality remains strong. HLBB has a credit costs target of 25bps to 30bps, but the company confirmed that the targeted figure is on normalised basis and does not include recoveries. Assuming some level of recoveries, net credit costs is likely to be less than 20bps (our forecasts: 21bps) for FY14F.

- The possible upgrade to our net earnings forecasts may stem from loans growth, fee income, and credit costs. We maintain a HOLD rating.

Source: AmeSecurities