- 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 14.7% for FY14F and an unchanged fair P/BV of 2.0x.
- Given the latest capital raising exercises by other Malaysian banks, we believe that there may be ongoing queries about HLBB’s banking entity’s capital ratios. For HLBB’s latest quarter results ended Dec 2013, the company reported a banking level CET 1 ratio of 10.0%. This looks adequate currently, as this is based on Bank Negara Malaysia’s (BNM) phase-in arrangements with regards to investments in associates and subsidiaries.
- However, on a fully loaded basis, banking level CET1 ratio would only be 6.6% currently. We estimate the banking CET1 ratio to reach 7.57% by 2018, which is the year that the phase-in arrangement will end and capital ratios will need to be on a fully loaded basis, which deducts out entirely the investments in associates and subsidiaries.
- While this looks to be above the minimum CET1 ratio requirement of 7% in 2019, the current minimum regulatory CET1 ratio does not yet include any potential counter-cyclical buffer (which is expected to be 1% to 1.5%, and expected to be implemented by BNM by 2016). The counter-cyclical buffer is currently not added to the current minimum CET1 ratio. Neither has the CET1 ratio taken into account any potential domestic SIFI (systematically important financial institutions) buffer that may be imposed by regulators.
- Assuming a reasonably comfortable for CET1 ratio to be at 10% eventually, we estimate the shortfall to HLBB’s capital to come up to RM3bil, by 2018, implying a possible rights issue ahead.
- Assuming the rights issue is priced at about 20% discount to the current market price, or at RM11.20/share, we estimate that a possible rights on a 1-right-for-7-share basis. This may lead to a possible new fair value of RM14.60/share FY14F, from our current RM15.90/share, based on lower ROE of 13.5% (from our current forecast of 14.7%) FY14F.
- Otherwise, we view HLBB’s earnings as solid, given the minimal asset quality risks. Net earnings may possibly continue to surprise on the upside during the next upcoming results, given the likely ongoing low credit costs. We maintain our HOLD rating as we expect share price to drift sideways with renewed uncertainty over capital.
Source: AmeSecurities
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