Journey to Wealth

Hong Leong Bank - Strong start already priced in?

kiasutrader
Publish date: Fri, 16 Nov 2012, 09:12 AM
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Period    1Q13

 

 
Actual vs.  Expectations  The 1Q13 PAT of RM478m was within the consensus' expectations (25%) and that of our estimate (25%). The robust PAT jump (+21%, QoQ +17%) was due to the higher revenue, better cost management and a strong impaired asset recovery booked in the quarter.  
 
Dividends   No dividend was proposed during the quarter.
 
Key Result Highlights   The results showed a 4% QoQ revenue growth. 
 
A strong growth in its non-interest income drove this  outperformance. The result saw an inspiring 14.5% QoQ increase in non-interest incomes to RM378.6m due  mainly to higher gains from treasury operation.
 
However, the net interest income was recorded at RM623.9m, which was down marginally by 1.8% QoQ. The decline here was due to falling in NIM by 21bps in 1Q13 to 2.13% (vs. 1Q12's 2.12%, FY12's 2.12%).  A particularly difficult margin environment has offset the benefit of its 1.3% QoQ (or +7.5% YoY) loan growth.  
 
 Fortunately, cost was substantially lower at RM442.9m, down by 7.0% QoQ due to a lower personnel cost. The group has continued to put in initiatives to extract efficiencies and synergies. This resulted in the cost-toincome ratio declining to 44.2% from 4Q12's 49.3%.  
 
 Meanwhile, the adoption of MFRS139 and coupled with proactive credit recovery efforts, the net impaired ratio and coverage ratio improved further to 1.61% (from 1.69% in 4Q12). While the loan loss coverage ratio declined to 134% from 158% in 4Q12, we still expect the sub-normal credit cost to continue until year-end.
 
Chengdu Bank's profit contribution meanwhile was flat at RM59m (vs. 4Q12: RM59m).   
 
The overall ROE remained steady at 15.7%.
 
Outlook   We are also seeing the positive impact from its merger synergies. Apart from the low-teen topline growth,  say ~12%, the bottomline growth will be further boosted to mid-teen, say ~16% YoY, due to lower credit cost.
 
Change to Forecasts   No changes in our earnings estimates. 
 
Rating   Maintain MARKET PERFORM
 
After the strong rally of late, we believe that the market has priced in its better prospect.
 
At the current share price level, the stock only offers a 4.6% upside to our target price. Coupled with the projected dividend yield of 2.4%, the stock offers  less than a 10% total return and hence, we are maintaining our MARKET PERFORM rating.
 
Valuation    Our TP is maintained at RM15.20, representing a 2.0x valuation of its FY14 BV of RM7.65. 
 
Risks   An unexpected higher dividend payout could drive up its valuation.
 
Source: Kenanga
HLBANK (5819)
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