- We maintain our BUY rating on Hong Leong Bank Bhd (HLBB) with an unchanged fair value of RM17.00/share. This is based on an ROE of 14.1% for FY15F and a fair P/BV of 1.9x.

- HLBB’s 1QFY15 net earnings, if annualised, topped our net earnings estimate by 2.5%, but were 1.8% below consensus estimate’s RM2,230mil for FY15F. The 1Q made up 25.6% and 24.6% of ours and consensus forecasts respectively. We consider net earnings to be in line with expectations.

- Loans was muted, due mainly to corporate repayments. Deposit was softer, most likely due to ongoing proactive NIM management. Despite the slower topline growth, costs were well contained. LDR was sustained at a healthy and comparatively low level of 80.3% in 1QFY15 (4QFY14: 80.0%). The LDR is within the targeted 80%- 82%.

- The company has now hinted at a possible capital raising exercise of RM1.7bil, which is lower than its earlier estimate of RM2.4bil. The RM1.7bil will also likely include some form of capital replacement for its RM3.6bil debt instruments facing first call redemption in FY16. The capital combinations being studied include possibly additional Tier 1 (ATI) papers, rights and sub-debt papers.

- We are positive on the much lower-than-expected size of the capital exercise being considered, which may now turn out to be RM1.7bil, in line with our estimated RM1.6bil rights issue, instead of the earlier hinted RM2.4bil.

- In addition, we still firmly believe there is room to manage capital via its treasury shares. The company has no firm plans for its treasury shares as it intends to maintain this as a buffer. The total number of treasury shares is substantial at 81.1mil shares. Recall that these were acquired at an extremely low cost of only RM5.32/share.

- At the current market price of RM14.00/share, we estimate that these 81.1mil treasury shares are worth RM1.15bil, which is essentially a hidden capital buffer. We have not included this in our forecasts. Thus, we believe there is scope to reduce its rights issue requirement eventually.

- We are maintaining our BUY rating on HLBB, as 1Q has proven to be highly resilient. We reiterate our view that any possible rights issue is probably well known in the market already. What is probably lesser known is its excellent hidden capital buffer of RM1.1bil in its treasury shares, which may reduce its rights issue requirement eventually.

Source: AmeSecurities