Journey to Wealth
Hong Leong Bank - Top line growth remains subdued HOLD
- At our recent company visit, we gather that Hong Leong Bank's (HLBB) loans growth is likely to remain muted. Loans growth is likely to range around 5% on an annualised basis, below the targeted 10% to 11% range. Loans growth continued to be affected by slow utilisation of trade financing facilities, which make up about 60% of its total business loans.
- In terms of SME loans, the company estimated the total SME industry has recorded a decline in the past six months, with HLBB's SME loans (13.6% of total loan) likely to be below industry trend. This has been due to a generally cautious sentiment among its SME customers, as well as slow utilisation of trade financing lines.
- The slower business loans are offset by generally stronger mortgage loans, which are expected to record a growth of around 7% on an annualised basis. HLBB indicated that the pricing for its mortgage loans is around BLR less 2.2%, above the industry's BLR less 2.4%. Net interest margin target is maintained at above 2%.
- The company is maintaining normalised credit costs target of 20bps to 25bps. We believe there will likely be ongoing recoveries, given that there are ongoing resuscitation efforts, with the majority of these impaired loans stemming from the exEON Bank. However, we are maintaining our credit cost assumption at 22bps for now.
- The group considers capital ratios to be adequate, with group common equity Tier 1 (CET1) estimated at 10.2% and the banking entity's CET1 at 8.3%. The company is maintaining a dividend payout ratio target at one-third of net earnings.
- In our visit, the company alluded to the possibility of reconsidering a dividend reinvestment plan (DRP) given that the timeline for compliance to possible countercyclical buffer is now likely in 2016.
- From the meeting, we expect net earnings to reflect previous quarter's trend, to be propped up by low credit costs, but offset by slow topline growth. What was new from the meeting is the possibility of a DRP plan, which we believe will lead to dilution in ROE. We maintain HOLD on HLBB.
Source: AmeSecurities
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