AmResearch
HONG LEONG BANK - Foggy prospects for Chengdu
Investment Highlights
· We maintain our HOLD rating on Hong Leong Bank Bhd (HLBB) with a lower fair value of RM13.30/share (from RM13.70/share previously), assuming a rights issue of RM2.9bil. This leads to a fully-diluted ROE of 11.5% (vs. 11.7% previously) for FY16F, and an unchanged fair P/BV of 1.4x for FY16F.
· From our recent company visit, we believe that while overall asset quality in Malaysia is expected to remain stable, HLBB’s 20%-owned associate Bank of Chengdu Co Ltd (Bank of Chengdu) is likely to experience some headwinds, in view of the macro situation in China.
· Thus, we expect Bank of Chengdu to continue to experience upticks in gross impaired loans and loan loss provisioning.
· To recap, Bank of Chengdu’s gross impaired loans ratio had increased to 1.1% six months ago, in its FY14 results (which has a different financial year-end of December, compared to HLBB’s June financial year-end). This uptick is from a 0.7% level in FY13.
· In absolute terms, we estimate that gross impaired loans had climbed 77% in FY14 to about RMB1.4bil, from RMB774mil in FY13.
· To reflect the latest indications, we have reduced our earnings forecast for Bank of Chengdu by about 8% for FY16F, taking the associate’s contribution to RM341.2mil (previously RM370.4mil) for FY16F.
· Our forecast for Bank of Chengdu’s FY16F is now based on credit costs of 90bps (previous forecast: 40bps) and gross impaired loans rising to 1.3% (previously 0.9%). We understand that the company has been on a more proactive provisioning stance since FY14.
· Besides reviewing our associate forecasts for Bank of Chengdu, we have also slashed our NIM forecasts for the group as whole.
· Our NIM forecast is reduced to 2.00% (from 2.08% previously) for FY15F, mainly to be in line with the latest trend and the company’s indication that NIM will likely continue to drift lower, from 1.92% seen in 3QFY15.
· All in, we have downgraded our net earnings forecasts by 1.1% for FY15F and 1.6% for FY16F.
· The main new information from our latest visit in our view, is an indication of likely less robust contribution from Bank of Chengdu in the near term. Maintain HOLD.
Source: AmeSecurities Research - 20 Jul 2015
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