- We maintain our HOLD rating on Hong Leong Bank Bhd (HLBB), with an unchanged fair value of RM15.90/share. Our fair value is based on a ROE of 14.5% for FY14F and an unchanged fair P/BV of 2.0x.

- HLBB’s annualised 1QFY14 came in at 8.7% above our forecasts and 7.8% above consensus estimates, owing mainly to positive write-back on loan loss provision and impairment lines, unexpectedly good treasury performance, and higher contribution from Chengdu.

- Lending revenue appeared to be more subdued, with annualised loans growth of 4.6%, below the company’s

targeted loans growth of at least 10% for FY14F. The deceleration came from the working capital and SME segments, in line with industry trend. NIM slid by a larger quantum of 7bps QoQ to 2.06% in 1Q compared to the previous quarter’s -1bps QoQ.

- The main positive surprise is that total investment and trading income are still quite decent, with a net gain of RM54.0mil in 1QFY14, against RM61.2mil in 4QFY13. We think that this is commendable considering the greater volatility in the bonds securities market in the September quarter.

- Furthermore, the company managed to record a higher unrealised marked-to-market gain (related to its longer term available-for-sale securities) of RM174.8mil in 1QFY14, if compared to RM163.1mil in 4QFY13 (3QFY13:RM204.4mil). This makes HLBB as one of the rare few to have made higher unrealised gains for its longer-term available-for-sale securities in this quarter.

- The key positive surprises in 1Q, in our view, were the treasury division’s good performance and loan loss write-back.

- However, given the volatility in the MGS market, we think that it may be too early to rerate HLBB’s share price based on the latest treasury performance. Otherwise, we think that the treasury division has performed commendably. We would also view the loan loss provision write-back as one-off in nature.

- Judging by the scale back in business deposits and subdued SME loans growth, we believe that the company will very likely revert to its normal ultra cautious stance in a slower economic growth environment. This is despite a possible new strategic focus to raise LDR ratio to 80%. Overall, we interpret the 1Q data as indications of slower loans growth ahead.

Source: AmeSecurities