- 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 3QFY14, if annualised, came in 3.0% above our forecasts and 2.0% above FY14F consensus estimate of RM2,025mil FY14F. The 9M made up 78.1% and 77.3% of ours and consensus forecasts respectively.

- Annualised loans growth was 6.1% in 3QFY14. This is below the company’s targeted loans growth of 8% for FY14F. However, we believe that the slower loans growth is probably in line with market expectations given the generally slower overall industry growth.

- The key loans growth drivers are still the residential mortgage and non-residential mortgage segments. This was offset by the slower working capital and SME segments.

- NIM improved by 12bps QoQ to 2.15% in 3QFY14, from 2.03% in 2QFY14 (-3bps QoQ). The better NIM was largely contributed by lower cost of funds, which is driven by a 1.6% QoQ drop in interest expense related to customer deposits. We believe this is due to the bank’s efforts to manage its fixed deposit tenures. The 9MFY14’s NIM came in at 2.08%, above the targeted NIM level of at least 2.00% for FY14F.

- Non-interest income posted a 44.4% QoQ drop to RM161.6mil in 3QFY14 (2QFY14: +9.4% QOQ), with declines mainly in fee income (lower credit card fees), investment and trading income, and forex lines. These were impacted by lower gains in trading securities and forex activities. Fee income ratio was 17.0% in 3QFY14 (2QFY14: 27.5%).

- The 3Q’s net earnings was supported by low loan loss provisions and low overhead costs. We think that the positive trend in this quarter was the strong increase in NIM, prompted mainly strong management of cost of funds.

- The other positive trend was the reversal in upticks in auto and residential mortgage impaired loans which was recorded in the previous 2Q.

- However, there were spots of unexpectedly soft patches in the non-interest income line in terms of fee income and forex income in our view.

- Maintain HOLD.

Source: AmeSecurities