We maintain BUY on Hong Leong Bank Bhd (HLBB), with anunchanged fair value of RM13.00/share. This is based on an adjusted (forrights) 14.7% ROE for FY12F, leading to a fair P/BV of 2.1x.

HLBB registered net earnings of RM381mil in 2QFY12, a 6.3%decline QoQ from RM407mil in 1QFY12. Annualised net earnings are in line withours and consensus' forecasts.

However, we note that 2QFY12 included a one-time provisioningfor a full staff voluntary separation scheme of RM114.7mil. Stripping off thisitem, we estimate net earnings to be 17% above our estimate, and 16% above consensus. 

Loans growth picked up to an annualised rate of 6.5% in 2QFY12,from 5.7% in 1QFY11. Loans growth would have been much stronger if not forlumpy repayments of selected project-related loans. SME loans registered a 6.6%QoQ rise, or at an annualised rate of 17.7%. Individuals' loans grew 8.5%annualised. NIM improved by a robust 9bps QoQ. 

Absolute gross impaired loans fell 1.5% QoQ; thus improvingthe overall gross impaired loans ratio to 2.0% in 2QFY11 from 2.1% in 1QFY12.Loan loss cover climbed to 141.9% in 2QFY12 from 137.8% in 1QFY12. The company alludedthat there had been no signs of strains in its loans portfolio, with continuingimprovement seen for its impaired loans.  

The company said it has achieved annualised synergies of RM191mil,exceeding its target of RM180mil. Revenue synergies, although not significantat this stage, has turned out to be stronger than the company's expectation.Webelieve HLBB's share price had been affected by share overhang post its rightsissue in October 2011, as well as concerns over Bank of Chengdu and the overallexternal uncertainty. At the current share price levels, HLBB is pricing incredit costs of 84bps, compared with 100bps at the recent low in the past threemonths (we have modelled in 70bps). HLBB's latest results prove that creditcosts are unlikely to be close to 84bps. 

We believe HLBB's 2QFY12 is strong in terms of top line (loansgrowth, NIM) as well as well-executed merger synergies. We remain positive onHLBB. Key catalysts for HLBB are:- (a) stronger-than-expected top line growth;(b) sustained asset quality, (c) seamless integration in its merger with EONBank; (d) better-than-expected ROE of close to its internal target of 16% to17%.

Source: AmeSecurities