- We maintain our HOLD rating on Hong Leong Bank Bhd (HLBB) with an unchanged fair value of RM11.70/share. Our fair value is fully diluted for the proposed rights issue, and is based on an unchanged fully-diluted ROE of 10.8% FY16F, leading to an unchanged fair P/BV of 1.2x.

- HLBB posted an 18% QoQ decline in net earnings in 1QFY16. This means that annualised net earnings fell short of our forecast by 5.6% and the consensus estimate by 7.4%. The 1Q net earnings made up 23.6% and 23.1% of our and consensus full-year net earnings, respectively, for FY16F. The main differences to our forecasts were the slower-than-expected net interest income, non-interest income and muted Bank of Chengdu (associate)’s line.

- Loans chalked up an annualised growth of 10.3% in 1QFY16, ahead of the bank’s targeted loan growth of 8% to 9% for FY16. The main driver for growth is still the existing pipeline for residential mortgage loans. In terms of loans by holders, loans to the SME segment grew at an unexpectedly flat annualised rate of only 1.6%. This is in contrast to our earlier understanding that loans growth will be boosted by the SME segment, due to the earlier launched lending programme targeting SME customers via its retail bank branches. However the company assured at the briefing that there remains a healthy pipeline of SME loans approved awaiting drawdown.

- Gross impaired loans balance recorded the first quarterly uptick in eight quarters, with a 2.0% QoQ rise in 1QFY16. The upticks came mainly from the residential and nonresidential mortgage segments, which was surprising to us. This is because HLBB is traditionally conservative with its focus on owner-occupier segments. The company hinted that most of the upticks came from the recent changes from the latest guideline on reclassification of rescheduled and restructured (R & R) loans.

- Thus, the key new information to us from the 1Q results, was the flattish rate of growth for its SME loans, despite the company alluding that it had made significant headways into this segment. In addition, there were some unexpected upticks in the residential and non-residential impaired loans segments, which were also not within our expectations, given that the company’s recent assurance that there had been no particular areas of major strains in its loans portfolio.

- The third piece of new information to us is HLBB indication it will be revising downwards its ROE guidance of 12% for FY16F, due to muted contribution from Bank of Chengdu, and impact from the rights issue. HOLD.

Source: AmeSecurities Research - 18 Nov 2015