-  We maintain our BUY rating on Hong Leong Bank Bhd (HLBB), with a revised fair value of RM17.00/share (from RM17.10). This is based on an ROE of 14.1% for FY15F and a fair P/BV of 1.9x. We have finetuned our forecasts following the release of its latest actual FY14 results.

-  HLBB’s FY14 net earnings surpassed our net earnings forecast by 4.9% and consensus estimate’s RM2,030mil by 3.6%. There was a one-off adjustment for tax refund of RM59mil. Stripping this off, net earnings is in line with consensus estimates and about 2.0% above our estimates. The main areas of positive surprises are the net interest income line (4% above our estimates), and better-than-expected contribution from Bank of Chengdu (20% above our forecasts).

-  Total single-tier dividend for FY14 thus added up to 41sen (FY13: GDPS of 45sen, net of 33.8sen), higher than our estimated 35sen for FY14 and consensus forecast of 39sen.

-  Total loans growth came in at 7.2% in FY14F, in line with the company’s targeted loans growth of circa 8%. More importantly, NIM held up well, given a mere 1bps QoQ drop from 3QFY14’s normalised NIM level. FY14’s total NIM of 2.08% (-5bps YoY) is well ahead of the company’s targeted NIM of at least 2.00%, attributed to tight asset-liability and liquidity management.

-  Asset quality continues to hold up well. Gross impaired loans showed an improvement given a 2.8% QoQ drop in absolute amount in 4QFY14. The gross impaired loans ratio was sustained at 1.2% in 4QFY14, unchanged from 1.2% in 3QFY14. Loan loss cover was stable at 128.9% in 4QFY14 (3QFY14: 129.3%) and remains as one of the highest in the industry.

-  The 4Q net earnings indicate stable loans growth, good NIM and consistent asset quality. HLBB’s share price had barely budged in the last two years. We believe this may be due to ongoing concerns over its low banking level CET1 ratio, and recent speculation about a possible rights issue.

-  However, we expect the concerns to dissipate given that any possible capital shortfall is now quantifiable, estimated at RM1.6bil. Assuming a possible capital raising exercise of at least RM1.6bil, and assuming this is to be done via a rights issue priced at a 20% discount to the current market price, or at RM11.20/share, we estimate that the rights issue may be on a 1-right-for-12 shares basis. We expect the following rerating catalysts ahead: (a) an improvement in NIM; (b) consistent asset quality; and (c) ROE being sustained at above 14%. Maintain BUY.

Source: AmeSecurities