Post-meeting with HLBANK recently, we reiterate our MARKET PERFORM rating with an unchanged TP of RM15.04. All in, we are still vigilant over: (i) its ultra-low credit cost, which is more susceptible to an up-cycle, and (ii) slower growth at BoC considering the high-base effect arising from its stellar performance last year. Furthermore, we do not rule out a potential capital raising exercise by 2016. On the plus side, its low foreign shareholding would see less pressure in foreign fund sell-offs.

Outlook for 2015. With structural and cyclical headwinds weighing down the banking sector, HLBANK believes their prudent growth approach in the past might pay off as 2015 should be a fairly resilient year. To recap, its FY15 guidance are: (i) net interest margin (NIM) to contract (at most) by 0bpts-8bpts, (ii) non-interest income as a percentage of total income is targeted at 25%, (iii) cost-to-income ratio (CIR) to trend lower to 42%- 44%, (iv) credit charge ratio at 25bpts-30bpts, (v) total loans growth of 10%, (vi) loan-to-deposit ratio (LDR) to be around 80%-82%, and (vii) ROE of at least 14%.

10% loans growth guidance is a tall order to achieve. Recall, system loans growth tapered to 8-9% last year (2013: +11%) and we are expecting it to decelerate further to 7-8% in 2015. Similarly, HLBANK saw its loans grew but a tad slower (by 1-2ppts) during the same period; key segments are residential property (+15%) and SME lending (+10%). Hence, we are keeping our FY15/FY16 loans growth projections for HLBANK at 6%/5.5%.

BoC’s growth should taper. HLBANK expects the operations of its 20% associate company, Bank of Chengdu (BoC) to stay resilient as the “City of Hibiscus” is still playing economic catch-up with other parts of China. However, back in November 2014, People's Bank of China had cut the one-year benchmark lending/deposit rates by 40bpts/25bpts. As a result, banks are likely to experience narrowing NIM (due to the asymmetrical rate cut), but asset quality may improve on the back of easing debt pressure. Hence, we reiterate our view that BoC’s growth should taper (+29%) – this is in consideration of the high base effect where it delivered a stellar performance last financial year (+40%).

Potential capital raising exercise by 2016. To note, its fully loaded CET1 ratio as at end-Sept 14 is 8.6% vs. Basel III minimum CET1 and capital conservation buffer requirement of 7% (by 2019). From our estimates, it could attempt to raise fresh capital of ~RM1bn-RM1.3bn to bring its fully loaded CET1 ratio to 10%; this is likely to be carried out by 2016. Consequently, its CY15 ROE could be diluted to 13.4% from 14% and TP being reduced to RM14.68.

Forecasts & risks. No changes to our forecasts. The key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, and (iv) weaker-thanexpected contribution from BoC.

Valuation & recommendation. With lack of re-rating catalysts on the horizon, we maintain our MARKET PERFORM rating on HLBANK with an unchanged TP of RM15.04. This is based on 1.61x CY15 P/B, derived from the Gordon Growth Model (COE of 9.8%, CY15 ROE of 14% and TG of 3%). Notably, our valuation implies -1SD below its 5-year average Fwd P/B. We opine that the stock could potentially de-rate as future growth rate tapers causing ROE to fall. The only cheer for HLBANK is its low foreign shareholding structure (Dec-14: 9.5%), which see less pressure in foreign fund sell-offs. 

Source: Kenanga