Buy (Maintained) Writebacks Help Lift Results. Financial - Banks Target Price: MYR16.60 Market Cap: USD7,947m Price: MYR14.22

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1 Nov12 Jan13 Mar13 May13 Jul13 Oct13 Vol m Results Review, Hong Leong Bank (HLBK MK) Buy (Maintained) Financial Banks Target Price: MYR16.6 Market Cap: USD7,947m Price: MYR14.22 Writebacks Help Lift Results Macro Risks Growth Value Price Close Source: Bloomberg Avg Turnover (MYR/USD) Hong Leong Bank (HLBK MK) Relative to FTSE Bursa Malaysia KLCI Index (RHS) m/2.77m Cons. Upside 6.3 Upside wk Price low/high (MYR) Free float 21 Shareholders HLFG 64.4 EPF 14.4 Shariah compliant David Chong, CFA david.chong@rhbgroup.com n HLBK s 1QFY14 results were 6% above our and 8% above consensus estimates, when annualised. Net profit was boosted by writebacks, which may not be sustainable going forward. Nevertheless, the results were still decent, with positive underlying trends such as stable NIMs, wellcontrolled overheads, sound asset quality and robust contribution from BoC. Reiterate BUY, with FV at MYR16.6 (CY14 P/E of 13.5x). maintained. Results in line. Hong Leong Bank (HLBK) reported a 1QFY14 net profit of MYR544m (+14% yoy; +31% qoq), ie 6% above our and 8% above consensus estimates, when annualised. Nevertheless, we consider the results to be in line as net profit was boosted by net writebacks of MYR15m in impairment losses and MYR18m in loan impairment allowances, both of which may not be sustainable going forward. Results highlights. Positives were: i) stable net interest margin (NIM) (flat yoy; +2bps qoq), ii) overheads remain tightly controlled. Thus, 1QFY14 costtoincome ratio (CIR) was stable yoy at 44.2% (4QFY13: 5.7%), iii) a net loan impairment writeback for 1Q, mainly due to a low individual allowance charge and continued recoveries, iv) robust contribution from 2%owned associate Bank of Chengdu (BoC), which HLBK said was operational in nature, and iv) asset quality improved further, as absolute gross impaired loans dipped by 2% qoq. On the flip side, the 7% yoy loan growth was below system growth of 9.5%. Loan and deposit growth. HLBK s annualised loan growth was at 5%, below its 1% target and our assumption. Growth was led by residential mortgages and small and medium enterprise loans, but working capital (mainly traderelated loans) and auto loans were muted. That said, the auto loan book should start to see traction from 2QFY14 onwards, while trade financing should improve in 2H, according to management. Meanwhile, the focus on growing current account and savings account (CASA) deposits was evident, as CASA increased by 12% vs its total deposit growth of 6% (figures annualised). The CASA ratio reached a new high of 26.3% (4QFY13: 25.9%). Asset quality. The gross impaired loan ratio improved by 4bps qoq to 1.36% while loan loss coverage (LLC) was at 13% vs the system gross impaired loan ratio and LLC of 2% and 97.6% respectively. Forecasts and investment case. We maintain our earnings forecasts and MYR16.6 FV (CY14 P/E of 13.5x). The strong 1Q results will help build a solid base for FY14F earnings. We believe street estimates are too low. Asset quality remains sound while valuations appear attractive, in our view. Maintain BUY. Forecasts and Valuations Jun11 Jun12 Jun13 Jun14F Jun15F Net interest income 1,883 3,49 2,969 3,21 3,489 Reported net profit 1,137 1,744 1,856 2,51 2,27 Net profit growth Recurrent net profit 1,137 1,744 1,856 2,51 2,27 Consensus EPS (MYR) EPS (MYR) DPS (MYR) Dividend Yield Return on average equity Return on average assets P/E (x) P/B (x) See important disclosures at the end of this report Powered by EFA TM Platform 1

2 Figure 1: Quarterly results FYE Jun 1QFY13 4QFY13 1QFY14 qoq yoy Comments Net Interest Income (+ Islamic Banking) YoY and qoq growth led by +7% yoy/+1% qoq expansion in loan base while NIM was broadly stable at 2% (flat yoy; +2bps qoq). Noninterest Income (.5) Flat yoy with: higher fee income (MYR163m vs. 1QFY13: MYR157m); higher dividend income (MYR14m vs. 1QFY13: MYR7m); and marktomarket (mtm) gains from HFT securities (MYR4m vs. 1QFY13: MYR6m loss) offset by lower net gain from sale of AFS securities (MYR14m vs. 1QFY13: MYR29m). QoQ jump led by: gains from sale of derivative financial instruments and AFS securities of MYR25m (4QFY13: MYR6m loss); higher forex gains of MYR43m (4QFY13: MYR17m); and fee income of MYR163m (4QFY13: MYR15m) partly offset by lower mtm gain from derivatives of MYR13m (4QFY13: MYR44m). Operating Income 1, , Noninterest income/total income improved qoq to 25.8% from 23.7% in 4QFY13 (1QFY13: 26.6%), and is close to the 2628% target for FY14. Less: Overhead Expenses (442.9) (494.6) (455.) (8.) 2.7 QoQ drop is mainly from nonpersonnel related costs with establishment, marketing and administration costs down 17%, 21% and 11% qoq respectively. Also, management had previously said that part of the higher 4QFY13 overheads was seasonal in nature. Preimpairment Profit Overall, CIR decreased qoq to 44.2% (4QFY13: 5.7%) but was stable yoy. Impairment losses on financial assets Impairment losses on loans, advances and financing >1 > (28.3) 18. > Individual allowance of MYR1m, (4QFY13: MYR121m; 1QFY13: MYR8m writeback); Collective allowance was MYR49m (4QFY13: MYR39m writeback; 1QFY13: MYR57m charge); and Recovery of MYR74m (4QFY13: MYR61m; 1QFY13: MYR68m). Credit charge (annualised) was 7bps (4QFY13: 12bps; 1QFY13: 7bps). Operating Profit Impaired loan formation (annualised) was 79bps vs 4QFY13: 136bps (1QFY13: 85bps). Associates Management said the improvement mainly reflects its stronger underlying business performance. Pretax Profit Less: Tax (159.8) (112.8) (154.9) 37.3 (3.1) ETR Net Profit See important disclosures at the end of this report 2

3 Figure 2: Gross loan book breakdown FYE Jun Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 qoq yoy Purchase of securities 1,77.5 1, (8.) Purchase of transport vehicles 17, , , , , Purchase of residential properties 31, , , , , Purchase of nonresidential properties 9, ,37.9 1, , , Personal use 3, , , ,52.2 3,451.6 (1.4) (3.7) Credit card 4, ,19.1 4,62.5 4,88.1 4,9.1. (1.7) Purchase of consumer durables (1.9) Construction ,.9 1,83.7 1, , Working capital 19, ,711. 2, , ,458.8 (1.4) 7.8 Others 3, , , , , (1.) Total 91, , , ,29. 98, Figure 3: Impaired loans by sector FYE Jun Gross Impaired Loans Gross Impaired Loans Ratio Dec 12 Mar 13 Jun 13 Sep 13 Dec 12 Mar 13 Jun 13 Sep 13 Purchase of securities Purchase of transport vehicles Purchase of residential property Purchase of nonresidential property Personal uses Credit cards Purchase of consumer durable goods Construction Working capital Other purpose Total 1, ,329. 1, , Figure 4 : Average Yield On IEA & Funding Cost And NIMs Avg yield on IEA Avg funding cost NIM Figure 6 : Overheads And CIR Trends Admin (LHS) Mktg & Comms (LHS) Establishment (LHS) Personnel (LHS) CIR (RHS) Figure 5 : Noninterest Income Contribution Other income (LHS) Investment income (LHS) Fee income (LHS) Noninterest income/total income (RHS) Figure 7 : Loan Impairment Allowances And Credit Cost (bps) (2) 4 5 (1) (2) (5) 5 (1) 1 (16) 15 (15) 2 (2) IA (LHS) CA (LHS) Write off (LHS) Recoveries (LHS) Credit cost (RHS) See important disclosures at the end of this report 3

4 Figure 8 : ROE And ROA Trends Figure 9 : YoY Loan Growth And LDR Trends ROE (LHS) ROA (RHS) YoY loan growth (LHS) LDR (RHS) Figure 1 : YoY Deposit Growth And CASA Ratio Trends YoY deposit growth (LHS) CASA ratio (RHS) Figure 11 : Gross Impaired Loans And Formation Trends (bps) 2, 16 1, , ,4 1, , Gross impaired loans (LHS) Impaired loan formation (RHS) Figure 12 : Gross And Net Impaired Loan Ratio Trends Figure 13 : Individual Allowance & IA/Impaired Loans Gross impaired loan ratio Net impaired loan ratio Individual allowance (LHS) IA/Impaired loan (RHS) Figure 14 : Collective Allowance & CA/Net Loans Figure 15 : Loan Loss Coverage Trend 2, , 1, , Collective allowance (LHS) CA/Net loans (RHS) Figures prior to 4QFY12 have not been restated for MFRS139 Figures prior to 4QFY12 have not been restated for MFRS139 See important disclosures at the end of this report 4

5 Figure 16 : CET1, Tier1 & Total Capital Trends CET1 Tier1 Total capital Figures prior to 4QFY12 have not been restated for MFRS139 See important disclosures at the end of this report 5

6 Financial Exhibits Profit & Loss Jun11 Jun12 Jun13 Jun14F Jun15F Interest income 3,79 6,36 6,464 6,831 7,312 Interest expense (1,826) (3,257) (3,495) (3,63) (3,823) Net interest income 1,883 3,49 2,969 3,21 3,489 Non interest income ,38 1,14 1,241 Total other income ,38 1,14 1,241 Total operating income 2,552 3,878 4,7 4,341 4,73 Total costs x depn & amortn (1,212) (1,925) (1,847) (1,95) (2,24) Operating EBITDA 1,34 1,953 2,16 2,436 2,75 Total costs (1,212) (1,925) (1,847) (1,95) (2,24) Operating profit 1,34 1,953 2,16 2,436 2,75 Total provision charges (135) 65 (34) (15) (193) Postprovision operating profit 1,25 2,18 2,126 2,286 2,512 Income from associates Pretax profit 1,415 2,236 2,393 2,599 2,873 Taxation (278) (493) (537) (549) (63) Profit after tax 1,137 1,744 1,856 2,51 2,27 Profit after tax & minorities 1,137 1,744 1,856 2,51 2,27 Reported net profit 1,137 1,744 1,856 2,51 2,27 Recurring net profit 1,137 1,744 1,856 2,51 2,27 Balance Sheet Employment Jun11 Jun12 Jun13 Jun14F Jun15F Net cust loans/assets Net earning assets / assets Nonearning assets/assets Net cust loans/cust deposits Equity / assets Equity / gross cust loans Equity & provns / gross cust loans Liquid funds / cust deposits Prov. charge / cust loans.2 (.)..1.2 Provision charge / avg assets.1 (.)..1.1 See important disclosures at the end of this report 6

7 Financial Exhibits Balance Sheet Jun11 Jun12 Jun13 Jun14F Jun15F Total gross loans 84,39 9,616 97,217 16, ,563 Securities total 19,818 35,351 33,184 34,843 36,585 Other interest earning assets 35,892 24,792 25,1 26,73 27,196 Total gross IEAs 139,749 15,76 155,41 167,855 18,343 Total provisions (2,583) (2,44) (1,786) (1,84) (1,841) Net loans to customers 81,455 88,573 95,431 15, ,722 Total net IEAs 137, , , ,51 178,52 Total investments 1,41 1,617 1,833 2,147 2,58 Tangible fixed assets Intangible assets 2,211 2,278 2,21 2,21 2,21 Other assets 4,24 4,828 5,199 1,692 (414) Total nonieas 8,333 9,45 9,97 6,814 5,18 Total assets 145, , , , ,61 Broad deposits 125, , ,24 142, ,16 Other interestbearing liabilities 8,816 9,399 1,799 1,839 1,881 Total IBLs 134,37 142, ,3 153, ,897 Other noninterest bearing liabilities 3,661 4,177 4,546 4,968 5,432 Total nonibls 3,661 4,177 4,546 4,968 5,432 Total liabilities 138,31 146,463 15, ,39 167,329 Share capital 1,58 1,88 1,88 1,88 1,88 Retained earnings reserve 3,986 5,356 6,197 7,123 8,361 Other reserves 1,92 4,468 4,959 5,472 6,4 Shareholders' equity 7,468 11,74 13,37 14,475 16,281 Total equity 7,468 11,74 13,37 14,475 16,281 Total liabilities & equity 145, , , , ,61 Key Ratios Jun11 Jun12 Jun13 Jun14F Jun15F Cust deposit growth Broad deposit growth Growth in IBLs Return on IEAs Cost of funds Net interest spread Net interest margin Interest return on average assets Return on average equity Return on average assets EPS growth Bv per share growth Operating profit growth See important disclosures at the end of this report 7

8 Jan11 Jan12 Jan13 Jan14 Jan15 Jan11 Jan12 Jan13 Jan14 Jan15 Hong Leong Bank (HLBK MK) SWOT Analysis Strong shareholder backing Wellknown as a working capital bank Ongoing rollout of ETP projects will eventually flow through the value chain and benefit the SMEs, where it has a strong presence Fierce competition will continue to put pressure on lending rates and deposit costs Adverse regulatory changes may impact the group significantly Relatively weaker corporate presence Lack of capital marketrelated income contributions, since its investment banking unit is a separately listed entity P/E (x) vs EPS growth P/BV (x) vs ROAE 25 45% % % 27% % 14.3% 11.4% % 9% % 5.7% 2.9% %..% P/E (x) (lhs) EPS grow th (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile The group is involved in the provision of conventional and Islamic banking services. The group s operations span across Malaysia, Singapore, Hong Kong, Vietnam and China, via its strategic shareholding in Bank of Chengdu. See important disclosures at the end of this report 8

9 NR Hong Leong Bank (HLBK MK) Recommendation Chart Price Close 16 Recommendations & Target Price Buy Neutral Sell Trading Buy Take Profit Not Rated 4 Nov8 Mar1 Jun11 Sep12 Source: RHB estimates, Bloomberg Date Recommendation Target Price Price Buy Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Source : RHB estimates, Bloomberg See important disclosures at the end of this report 9

10 RHB Guide to Investment Ratings Buy: Share price may exceed 1% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longerterm outlook remains uncertain Neutral: Share price may fall within the range of +/ 1% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 1% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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