- 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 an ROE of 14.5% for FY14F and an unchanged fair P/BV of 2.0x.

- HLBB‘s 2QFY14 earnings, if annualised, was 5.0% above our forecasts and 4.5% above FY14F consensus estimate of RM2,015mil. The 2H made up 53.1% and 52.9% of ours and consensus forecasts respectively.

- Annualised loans growth was better at 6.9% in 2QFY14 (1QFY14: 4.6%), but is still below the company’s targeted loans growth of at least 10% for FY14F. The key growth drivers are still the residential mortgage and non-residential mortgage segments.

- Business loans seem to be better, with working capital loans growth higher at 1.0% QoQ in 2QFY14, compared to -1.4% QoQ in 1QFY14. Loans growth to SME came in higher at 3.6% QoQ in 2QFY14, compared to 1.9% QoQ in 1QFY14. Non-interest income rose by 9.4% QoQ in 2Q, mainly driven by credit card fees and service fees.

- Deposit growth remained flat at 0.3% QoQ in 2QFY14, slower than 1QFY14’s 1.5% QoQ. This means that LDR is now 79.9%, close to the targeted 80%.

- Gross impaired loans crept up by 0.5% QoQ in 2QFY14 (1QFY14: 1.9% QOQ), making this quarter the second consecutive quarter of uptick in two years. As with most other banks, HLBB also reported worsening auto impaired loans. Auto impaired loans has increased by 3.9% QoQ, after a 4.8% QoQ rise in 2QFY14.

- This means that the gross impaired loans ratio for this segment has increased to 1.4% in 2QFY14, against 1.3% in 1QFY14, indicating that the increase in auto impaired loans is not mainly due to rising loan base.

- There was also an increase in impaired loans for the residential mortgage segment in this quarter, by 5.3% QoQ, which we consider as surprising given HLBB’s generally tight credit criteria. The company attributed the upticks in both auto and residential mortgage impaired loans to the slower year-end repayment seasonal effects, although notably HLBB did not experience this in the previous year.

- The main positive surprises in 2Q are the better credit card fees, as well as higher working capital and SME loans, although it remain to be seen if this is sustained post the festive season. However, we are cautious on the upticks in auto and residential mortgage loans, declining loan loss cover as well as flat CASA growth.

Source: AmeSecurities