- 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.

- From our recent company visit, we expect HLBB’s asset quality to remain excellent, given that it has been relatively cautious in selected commodity and real estate segments. We also expect good recoveries, which should lead to low credit costs overall in the short term.

 - Otherwise, we have revisited our rights issue assumption in view of greater uncertainty in the macro environment. We now expect HLBB’s minimum comfortable level of fully-loaded CET1 ratio to be likely higher at 10.5%, instead of our earlier estimated 10.0%. This is due mainly to the higher-than-expected counter-cyclical buffer being proposed by regional countries, ranging from 2.0% to 2.5%. (This is higher than market expectations of 1.0% to 1.5%).

 - Thus, all in, we now estimate HLBB’s potential rights issue to be RM3.1bil, which is higher than our last assumption of RM1.6bil three months ago. This is closer our original forecast in early 2014, when we projected a rights issue of RM3bil.

 - This means a potential rights issue of 269mil new shares, on a 1-for-7 share basis, if assuming the rights is priced at a 20% discount to current market price, or about RM11.20/share.

 - Under this scenario, ROE is likely to be diluted downwards by only 1ppt to 13.1%, from our current estimate of 14.1% for FY15F. This takes our fair P/BV for the stock to 1.7x, from 1.9x, leading to fully diluted fair value of RM15.00/share. Based on ex-rights price of RM13.65/share, there is still decent upside to our projected fully diluted fair value of RM15.00/share.

 - Notwithstanding this, we still think there is the excellent hidden capital buffer of RM1.1bil in its treasury shares, which may reduce its rights issue requirement eventually. There are currently still no firm plans for its treasury shares.

 - HLBB offers one of the safest exposure to the banking sector given its excellent asset quality. Yet, share price performance has been flat, which we think may be related to uncertainty over the size of its rights issue. However, based on our latest reassessment, the size of the rights issue is still within our initial estimates. We remain positive on HLBB and maintain our BUY rating.

Source: AmeSecurities