HONG LEONG BANK BHD. Extraction of merger synergies well on track Company report. Rationale for report: Company visit. Investment Highlights

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1 - BNKING HNG LENG BNK BHD (HLBK MK, HLBB.KL) 16 ril 212 Extration of merger synergies well on trak Comany reort Rahel Huang Rationale for reort: Comany visit BUY (Maintained) Prie Fair Value 52-week High/Low Key Changes Fair value EPS RM12.56 RM14.1 RM RM9.8 Unhanged Unhanged Investment Highlights We maintain BUY on Hong Leong Bank Bhd (HLBB), with a fair value of RM14.1/share. This is based on an adjusted (for rights) RE of 15.6% FY12F, leading to a fair P/BV of 2.3x. YE to Jun FY11 FY12F FY13F FY14F Total inome (RMmil) 2, , , ,52.2 Core net rofit (RMmil) 1, , , ,51.3 Core EPS (Sen) EPS growth (%) Consensus EPS (Sen) n/a DPS (Sen) BV/share (RM) PE (x) Div yield (%) P/BV (x) RE (%) Stok and Finanial Data Shares utstanding (million) 1,879.9 Market Ca (RMmil) 23,611.7 Book value (RM/share) 4.77 P/BV (x) 2.6 RE (%) 16.3 Major Shareholders Hong Leong Finanial Grou (63.5%) Emloyees Provident Fund (11.8%) Free Float (%) 5. vg Daily Value (RMmil) 12.7 Prie erformane 3mth 6mth 12mth bsolute (%) Relative (%) ) M 9. (R PP 12247/6/211(2971) 9 1 HLBank FBM KLCI ,684 1,549 1,413 1,278 1,142 In d e x P o in ts HLBB is now targeting a high-teen growth for its SME segment, whih urrently makes u 15% of its total loan book. With its exanded 33-branh network ost merger, it remains on trak to onvert about 5 of these into new Community Business Banking Branhes. These are defined as branhes serving SME businesses within lose roximity to them. The identified targets are the traditional family-based businesses. We believe this reresents new growth area for HLBB and indiates the omany s strong exeution in terms of fully utilising its exess branh aaity following the merger. In terms of reent loan demand trend from its exortsoriented ustomers, HLBB hinted that its business banking loan division has generally seen slower demand, due largely to its business borrowers adoting a more autious stane. However, there is also an offsetting ositive feedbak from its domesti-oriented business borrowers, who are otimisti about rollout of domesti Eonomi Transformation Programme (ETP)- related rojets. HLBB is targeting an overall loans growth (exluding reayments) in the high single-digit levels. HLBB alluded to gross imaired loans remaining benign so far. Its early-alert monitoring system, whih allows the bank to monitor loan reayment and aging analysis, has not turned u any worrying trends for any artiular segment of its loans ortfolio. s for lean-u rovisions, we understand these have already been largely rovided for in 1HFY12. This was done through the harmonisation of olletive and individual assessment oliies with EN Bank s. Non-interest inome is exeted to normalise in the absene of marked-to-market losses related to interest rate swas. For its fee-based inome, we understand that its revious two quarters strong erformane in artiular in relation to its redit ards segment is likely to be sustainable. HLBB is well on trak to realise further synergies from the merger but we believe it remains under-areiated for its strong exeution trak reord to date. We remain ositive on HLBB. Key atalysts are:- (a) a strongerthan-exeted to line growth; (b) sustained asset quality, () seamless integration in its merger with EN Bank; (d) better-than-exeted RE of lose to its internal target of 16% to 17%.

2 Hong Leong Bank Bhd 16 ril 212 LEVERGING N BRDER NETWRK T RECH UT T NEW SME SEGMENT HLBB is onverting 48 of its original 329 branhes into the new Community Business Banking Branhes. f the 48 branhes, we understand that about 42 are inherited from EN Bank, while another 6 would be onverted from HLBB s existing branhes. Besides the 48 branhes, HLBB intends to add on two new Community Business Banking Branhes, one of whih has already been set u at Southgate near Jalan Sungai Besi in Kuala Lumur sine Marh 212. Thus, HLBB is exeted to have a total of 5 new Community Business Banking Branhes. It now has a total of 33 bank branhes, raised from 329 ost the merger, with the new Southgate branh. New Community Business Banking Branhes to reah out to estimated 97% of registered SME ustomers Based on its internal estimates, HLBB rekons that with the 5 Community Business Banking Branhes, it will be loated lose to 97% of registered SME businesses. The new segment targets for HLBB s Community Business Banking Branhes are the traditional familybased businesses in their lose roximity. The threshold loan amount is less than RM4mil. Generally, the Community Business Branh Manager may have autonomy to arove loan amount limits u to RM3mil, with larger loan amount arovals to be obtained from the Head ffie. loan book. Besides the Community Business Banking Branhes, there are also another 39 Business Banking Centres whih serve the larger ommerial loans. These larger ommerial loans are onsidered generally to be those in exess of RM4mil. In terms of loan mix, HLBB estimated that about 55% of its SME loan book omrises ommerial loans, while the smaller SME segment makes u 45%. With its new distribution reah, it is targeting a longer term mix of 45% ontribution from ommerial loans and 55% from SME loans, over the next 3 to 4 years. Credit assessment ability rovides barrier to entry s we mentioned in our branh visit note dated 19 ril, we onsider this to be a new business segment for HLBB, as the grou had reviously not laed emhasis on the utilisation of its branh network to reah out to the businesses in the viinity. We understand the omany is targeting to have at least two redit offiers in eah of these Community Business Banking branhes. Given that they are likely to serve the traditional family-based businesses, these redit offiers are trained in terms of assessment of their ash flow and more imortantly, are also required to know the historial bakground of these businesses.. HLBB rekons that its losest ometitor in this segment is likely to be Publi Bank, where the latter has historially exelled in terms of non-residential (shohouse) finaning. Larger mix of ommerial loans now vs. the SME The SME segment urrently makes u 15% of its total (RM mil) CHRT 1: SME LNS S T END-DECEMBER 211 6, 54,48 5, 4, 3, 31,894 29,825 2, 1, 13,278 11,526 5,919 - Maybank PBB CIMB HLBB RHB Ca FG mresearh Sdn Bhd 2

3 Hong Leong Bank Bhd 16 ril 212 verage yield is ometitive but HLBB intends to rotet margins with some rodut bundling While the average lending rate for this segment is now hovering at base lending rate (BLR) less 2.2% to BLR less 2.3%, it exets the overall average yield to be roed u by rodut bundling and additional loan failities. Besides traditional asset-based finaning, HLBB is also targeting to bundle these with working aital loans and overdraft failities. Thus, it foresees higher average lending yields from the SME segment, omared to the onsumer segment. verage valuation for reent loan failities is set lower than market rie whih is onservative and rovides a good buffer s for the higher areiation of non-residential roerty ries over the last one year, we understand from our branh visit that the normal loan amount is set lower than market rie, deending on the loation. So far, we understand that ries for the non-residential segment in Klang Valley are holding u. HLBB believes that it would have some buffer as its internal valuation is generally set at 1% to 15% lower than market rie, with finaning margin robably at around 8% to 85%. We understand the average loan-to-value for its SME loan book is around 8% urrently. For the onsumer segment, it has not seen muh imat from the new Resonsible Lending Guideline. Targeting high single-digit loans growth Based on our reent omany visit, we understand that HLBB s overall loans growth target is likely to be in the high single-digit, exluding reayments. For 1HFY12, HLBB had ahieved an annualised loans growth of 6.5%. It would have been stronger if not for lumy reayments of seleted rojet-related loans. Without the lumy reayments, annualised loans growth is estimated at 9%. SME loans registered a 6.6% QoQ rise, or at an annualised rate of 17.7% in 1HFY12. Looking ahead, the omany exets the wholesale segment to ik u. Individuals loans grew 8.5% annualised in 1HFY12. The omany hinted that it is targeting a high single-digit loans growth for the segment. HLBB foresees the industry loans growth at 1% to 11% this year. In terms of its own overall loans growth target, whih has now been set at the high single-digit level, it foresees further ost merger rebalaning in some of merged loans ortfolio. We believe this is to allow HLBB to ontinue to adhere to its overall high redit assessment standards, whih is ositive. We are maintaining our loans growth foreast at 6.9% FY12F. SUSTINBLE LN GRWTH LIKELY IN HIGH SINGLE-DIGIT LEVEL Demand trend had been softer generally from its business borrowers In terms of reent loan demand trend from its exortsoriented ustomers, HLBB hinted that its business banking loan divisions generally has seen slower demand. This is beause its business borrowers are remaining autious. Its internal feedbak from these borrowers indiates that they have been holding lesser stok inventories in antiiation of slower end-onsumer demand, mainly due to the ossibility of slower external growth, but the antiiated slower end-onsumer demand has so far not materialised. HLBB has thus seen some slowdown from the manufaturing segment overall, for borrowers whih are geared towards the external setor. However, it has also seen some offsetting effet from a more ositive feedbak from its domesti-oriented ustomers, largely in antiiation of large ETP (Eonomi Transformation Programme)-driven rojets suh as the MRT. mresearh Sdn Bhd 3

4 Hong Leong Bank Bhd 16 ril 212 CHRT 2: TTL NN-INTEREST INCME Fee inome Investment, dividend, and other inome Total non-interest inome Q11 2Q11 3Q11 4Q11 1Q12 2Q12 should be minimal. NN-INTEREST INCME UNLIKELY T BE FURTHER FFECTED BY MTM VLTILITY Reall that the non-interest line in 1HFY12 was artly affeted by unrealised losses in the finanial assets and derivatives line. The loss amounted to RM31.9mil in 2QFY12, and a larger RM57.1mil in 1QFY12. The losses were related to interest rate swa ontrats, whih were undertaken to hedge HLBB s fixed rate ortfolio. The omany larified that the interest rates hedge was affeted by two unexeted develoments. First was the US s additional easing rogramme in mid-211, and the seond was the subsequent US Fed s deision to hold rates steady, rather than raise rates. The losses led to omression in the investment inome ortion of the non-interest inome line in both quarters (see Chart 2 above). Fee-based inome from redit ards exeted to be sustainable More imortantly, we understand that most ortions of the fee-based inome are likely to be sustainable. further breakdown of this is shown in Chart 3 below. In artiular, the other fee inome, whih reflets largely redit ard fees, is likely to be sustained at around the RM1mil level/quarter (RM97mil in 2QFY12 see Chart 3 below). We understand that the losses in the uoming quarters CHRT 3: FEE PRTIN F NN-INTEREST INCME (RM mil) Commissions Servie harges and fees Guarantee fees ther fee inome Total Fee Inome Q11 2Q11 3Q11 4Q11 1Q12 2Q12 mresearh Sdn Bhd 4

5 Hong Leong Bank Bhd 16 ril 212 CHRT 4: LN UTSTNDING FRM CREDIT CRDS 6, end-marh 211 end-de 211 5, 4,5 4,89 4,338 4,1 4,2 4, 3, 2,445 2, 1,674 1,632 1,78 1,321 1,522 1, MBB HLBB-EN Bank CIMB Eon Ca RHB Ca PBB FG New redit ard osition should enable it to rovide more omelling rogrammes s mentioned before, we believe this is mainly due to eonomies of sale from its redit ards division, for whih HLBB s ranking in terms of loans outstanding from redit ards ost the merger is now at number 2 (from no 3 before the merger) among the loal banks. This is shown in Chart 4 above. The muh better ositioning should enable HLBB to rovide more omelling rogrammes for both its redit ard users and merhants, with a likely inrease in fees from both these segments. GRSS IMPIRED LNS REMIN BENIGN HLBB alluded to gross imaired loans remaining benign so far. s for the onsumer segment, HLBB ehoed other banks view that this segment is exeted to remain benign. lthough okets of the roerty segments, for examle, the higher-end ondominiums, have risen substantially, it believed that the borrowers/landlords ould sustain reayments for long eriods of time while their units remain emty. HLBB hinted that the average loan-to-value for the onsumer segment is about 85%. s mentioned earlier, the average loan-to-value for the SME ortfolio is about 8%. Thus, as to whether there ould be an imat on valuation of its existing loans, and therefore loan loss rovisioning, should roerty ries soften, it believes it has suffiient buffer urrently in its average LTV. Its early-alert monitoring system, whih allows the bank to monitor loan reayments and aging history, has so far not turned u any worrying trends in any artiular segment of its loans ortfolio. No major strains or worrying trends in its SME ortfolio so far We understand as well there have been no major strains in the omany s SME ortfolio, although HLBB hinted that it has deteted these borrowers being more vigilant in monitoring olletion sine the seond half of last year. We understand that imaired loans trend for the SME ortfolio has remained benign so far, with no major utiks seen over the ast few months. mresearh Sdn Bhd 5

6 Hong Leong Bank Bhd 16 ril 212 TBLE 1: HRMNISTIN F PRVISINING PLICY WS DNE LRGELY IN 1Q Colletive assessment (C) allowane balane 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 ening balane ,575 1,575 rising from harmonisation of rovisioning oliy Provisions made (writebak) during the year quisition of EN Bank mount transferred from individual assessment mount written bak in reset of reoveries (21) (46) (65) (11) (62) (142) mount written off (29) (66) (94) (217) (54) (114) Unwinding inome (3) (6) (9) (11) (2) (4) Exhange differene () () Closing balane ,575 1,816 1,872 Individual assessment allowane balane 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 ening balane quisition of EN Bank rising from harmonisation of rovisioning oliy Provisions made during the year mount transferred to olletive assessment (48) (48) mount reovered (2) (9) (17) (83) (29) (67) mount written off (8) (17) (44) (64) (76) Unwinding inome (3) (9) (12) (15) (2) (3) Exhange differene Closing balane Loan loss rovision 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 llowane for bad and doubtful debts and finaning: General allowane (net) Seifi allowane 2 7 (2) (18) (9) (34) Seifi allowane written bak Bad debts and finaning written off Bad debts and finaning reovered (23) (23) (22) (84) (78) (89) Total in P&L (3) Bulk of lean-u rovisioning is now onsidered to be largely rovided for HLBB also hinted that with the harmonisation of its olletive and individual assessment oliies with EN Bank s sine 1HFY12, it onsiders the bulk of its leanu rovisions to be largely over. For housekeeing uroses, the omany hinted that the oosing entry was osted to the other assets segment in the balane sheet. This is exeted to be reversed and osted to the goodwill aount in the balane sheet in the final quarter. Reall that with the realignment, the omany had taken in additional olletive and individual assessment rovisioning. This is shown in the inrease in olletive and individual assessment breakdowns (see Table 1 above) in the balane sheet. The total rovided is now RM141mil in the Colletive ssessment ortion, while there is an additional RM115mil taken in, in the Individual ssessment ortion. The amount harmonised is thus RM256mil (i.e. total of RM141mil and RM115mil). mresearh Sdn Bhd 6

7 Hong Leong Bank Bhd 16 ril 212 CHRT 5: NRMLISED QURTERLY ERNINGS (RMmil) 1, (2) (65.6) Reorted earnings VSS Reoveries Bank of Chengdu Tax effet Normalised ore earnings (28.9) N TRCK T CHIEVE STRNG QQ NET ERNINGS GRWTH IN UPCMING QURTER s we had mentioned in our earlier reort, while HLBB had reorted a net earnings of RM381mil in its reent 2QFY12, we believe ore net earnings should be loser to RM468mil (see Chart 4 above). This was beause 2Q inluded several one-off items, inluding:- 1) one-off searation osts in terms of ersonnel osts (VSS osts of RM115mil; and staff savings osts makes u the remainder of our estimated RM155mil knok-off from normalised staff osts); we believe a higher QoQ net earnings of lose to RM47mil is already quite a strong ahievement. MINTIN BUY WITH HIGHER FIR VLUE F RM14.1/SHRE We are maintaining our BUY on HLBB, with a fair value of RM14.1/share. This is based on an adjusted (for rights) RE of 15.6% for FY12F, leading to a P/BV of 2.3x. Key atalysts for HLBB are:- (a) stronger-than-exeted to line growth; (b) sustained asset quality, () betterthan-exeted ontribution from Bank of Chengdu, and (d) seamless integration in its merger with EN Bank; (e) likelihood of ahieving lose to its internal RE target of 16% to 17% for FY12F. 2) off-set by stronger-than-exeted bad debt reoveries of RM66mil; 3) Bank of Chengdu was also affeted by one-off FRS139 adjustment in relation to effetive interest rates. We believe HLBB is now on trak to ahieve net earnings of lose to RM47mil in the uoming quarter. ur earnings foreast of RM1,649mil FY12F is lower than onsensus RM1,842mil FY12F. ur net earnings imlies net earnings of at least RM47mil in the uoming last two quarters of FY12F, whih we believe is highly ahievable. Note that onsensus net earnings had been raised substantially to RM1,842mil from RM1,561mil rior to the results. Consensus net earnings imly net earnings of RM52mil in the last two quarters of FY12F, whih we exet to be strethed. The omany indiated that it is still in the midst of merger integration. Considering this, mresearh Sdn Bhd 7

8 Hong Leong Bank Bhd 16 ril 212 TBLE 2: FINNCIL DT Inome Statement (RMmil, YE 3 Jun) F 213F 214F Net interest inome 1, , , , ,844.4 Non-interest inome , ,6.6 Islami banking inome Total inome 2,56.9 2, , , ,52.2 verhead exenses (916.5) (1,25.6) (1,811.2) (1,766.4) (1,812.8) Pre-rovision rofit 1,14.5 1, , , ,689.4 Loan loss rovisions (15.) (137.3) (335.4) (373.5) (331.7) Imairment & others ssoiates Pretax rofit 1, , , , ,617.6 Tax (197.3) (276.9) (467.2) (525.8) (566.3) Minority interests..... Net rofit , , , ,51.3 Core net rofit , , , ,51.3 Balane Sheet (RMmil, YE 3 Jun) F 213F 214F Cash & deosits with FIs 15, , , , ,18.6 Marketable seurities 27, ,3.5 27, , ,46.2 Total urrent assets 43, ,48.1 6, , ,64.8 Net loans & advanes 37, , , , ,454.5 Statutory deosits..... Long-term investments ,21.9 5, , ,837.2 Fixed assets Intangible assets , , , ,866.5 ther long-term assets 3, ,696. 2, , ,39.4 Total LT assets 41, , , , ,883.9 Total assets 84, , , , ,948.6 Customer deosits 69, , , , ,352.5 Deosits of other FIs 3, , , , ,29.4 Subordinated debts ,81.3 4, , ,767.3 Hybrid aital seurities , ,32.4 2,345. 2,389.5 ther liabilities 3, ,62.4 3, ,75.5 4,76. Total liabilities 78, , , , ,614.7 Shareholders funds 6,424. 7, , , ,333.9 Minority interests..... Key Ratios (YE 3 Jun) F 213F 214F Total inome growth (%) n/a Pre-rovision rofit growth (%) n/a Core net rofit growth (%) Net interest margin (%) Cost-to-inome ratio (%) Effetive tax rate (%) Net dividend ayout (%) Key ssumtions (YE 3 Jun) F 213F 214F Loan growth (%) Deosit growth (%) Loan-deosit ratio (%) Gross NPL (%) Net NPL (%) Credit harge-off rate (%) (.3) (.2) (.4) (.4) (.3) Credit harge-off rate (exl GP) (%) (.2).2 (.2) (.3) (.3) Loan loss reserve (%) RWCR (%) Core (%) Soure: Comany, mresearh estimates mresearh Sdn Bhd 8

9 Hong Leong Bank Bhd 16 ril 212 Published by mresearh Sdn Bhd (33515-P) ( member of the minvestment Bank Grou) 15th Floor Bangunan mbank Grou 55 Jalan Raja Chulan 52 Kuala Lumur Tel: (3) (general) (3) /99 (dealing) (3) (researh) Fax: (3) The information and oinions in this reort were reared by mresearh Sdn Bhd. The investments disussed or reommended in this reort may not be suitable for all investors. This reort has been reared for information uroses only and is not an offer to sell or a soliitation to buy any seurities. The diretors and emloyees of mresearh Sdn Bhd may from time to time have a osition in or with the seurities mentioned herein. Members of the minvestment Grou and their affiliates may rovide servies to any omany and affiliates of suh omanies whose seurities are mentioned herein. The information herein was obtained or derived from soures that we believe are reliable, but while all reasonable are has been taken to ensure that stated fats are aurate and oinions fair and reasonable, we do not reresent that it is aurate or omlete and it should not be relied uon as suh. No liability an be aeted for any loss that may arise from the use of this reort. ll oinions and estimates inluded in this reort onstitute our judgement as of this date and are subjet to hange without notie. For mresearh Sdn Bhd Benny Chew Managing Diretor mresearh Sdn Bhd 9