In our view, HL Bank has executed its strategies to manage NIMs well.Its cost efficiency as well as asset quality  are among the best in class. However,  we  see  these  positives  largely  being  overshadowed  by  the need to shore up capital, which could be a dampener on its share price performance.  Hence,  we  downgrade  our  call  to  NEUTRAL  from  Buy,with a revised FV of MYR14.90 (from MYR16.40).

• Auto loans growth needs time to pick up. While the rebalancing of the auto portfolio is largely  completed,  management  said  that it  would  take time before growth starts to pick up as HL Bank  rebuilds its relationship with auto dealers. Its auto loans book makes up 17% of total loans.
• Managing  funding  cost  very  well.  HL  Bank  has  managed  its  net interest margin (NIM) well, with its  9MFY14  NIM of 2% holding steady yo-y as  the  lower average asset yield (-8bps y-o-y) was offset by lower average funding cost (-10bps y-o-y). We gather that HL Bank managed to  lower  its  funding  cost  by  shortening  the  tenor  of  its  fixed  deposits. However,  with  a  looming  hike  in  the  overnight  policy  rate,  it  plans  to lengthen the  fixed deposits  tenor  ahead of the increase. While this will raise funding cost and pressure NIMs  in the near term, the higher cost would be more than made up when asset yields reprice up further out.
• Capital. We  estimate  HL  Bank’s  fully-loaded  CET-1  ratio  was  7.2%  at the  bank  level  (group:  8.2%)  as  at  end-March.  Its  ongoing  capital optimisation initiatives saw the release of MYR600m in capital from  the former  Eoncap  Islamic  Bank,  which  added  an  estimated  70bps  to  its CET-1  ratio  in  3QFY14.  Going  forward,  we  understand  that  further capital releases will not be as significant.  To raise  its  CET-1 ratio to 9-10%,  we estimate HL Bank may need MYR1.7bn-2.7bn in capital.  This would result in ROEs diluting to 12.5-13.5%. Note that these estimates are based on  its  end-March  results. Over time, HL Bank will be able to build up its capital and may only need a smaller capital raising exercise.
• Forecasts. We lower our FY14/FY15 net profit projections by 0.7%/2.5% respectively,  mainly  after  we  trim  our  FY14  loan growth  assumption  to 8% from 10% (FY15F assumption of 9% unchanged).
• Investment  case.  We  lower  our  GGM-derived  FV  to  MYR14.90  from MYR16.40 after: i)  raising  our COE assumption to 10% from 9.5%; and ii) lowering our ROE assumption to 14% from 14.5%. These changes are to  reflect  the  potential  capital  raising  HL  Bank  may  potentially  need. Recommendation downgraded to NEUTRAL from Buy.

Source: RHB