20 August 2010
20 August 2010
MARKET DATELINE
♦ Asset quality. 4Q NPL formation (annualised) improved to 109bps Relative Performance To FBM KLCI
(3Q10: 191bps) due to broad-based improvement in asset quality. As at
end-Jun ‘10, HL Bank’s gross and net NPL ratios as well as LLC stood at
1.9%/1.2%/117% respectively. Core capital and RWCAR ratios remained
healthy at 15.5%, among the highest in the industry and, more Hong Leong Bank
♦ Dividends. As expected, HL Bank declared a final gross DPS of 15 sen FBM KLCI
(4Q09: 15 sen), which brought the total gross DPS for FY10 to 24 sen
(FY09: 24 sen). This translates to a net payout ratio and net yield of 27%
and 2% respectively.
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Briefing Highlights
♦ FY11 outlook. Management explained that the low effective tax rate for FY10 was a result of effective tax
planning, helped by a RM30m tax refund. Management believes the effective tax rate should remain low going
forward. Similarly, management appears comfortable that loan provisioning levels would also remain low going
forward.
♦ FRS139. Due to the more stringent classification criteria for impaired loans under FRS139, management
estimates the gross impaired loan ratio could rise to 2.4% from the current gross NPL ratio of 1.9% under GP3.
Consequently, LLC is expected to fall to around 111% from the current ratio of 117%.
♦ Overseas operations. Management was optimistic on the prospects for its associate, Bank of Chengdu (BoC).
BoC posted net profit growth of 18% for its FYE 31 Dec 2009 while asset quality improved further with the gross
NPL ratio dropping to 1.3% as at end-2009 from 3.5% at end-2008. LLC and RWCR stood at 167% (2008: 154%)
and 13.6% (2008: 16.8%) respectively. Management highlighted that HL Bank has been working together with
BoC and some initial fruits reaped include transforming the branches to become more consumer centric, which
were previously business centric. Consequently, BoC’s consumer loan book is now 3.3x larger than back when HL
Bank invested in BoC while treasury operations could present opportunities for the future. We note that 4Q10
contribution from BoC has more than doubled yoy and qoq (Table 2), which suggests that its earnings post FYE
31 Dec 2009 is gaining further traction and this would be positive for HL Bank as well. BoC may go for an IPO,
but this is only likely to take place 2.5-3 years down the road.
Apart from the above, HL Bank’s regional aspirations remain unchanged. Under its strategic plan of “Embedding
Hong Leong Bank in the Region”, HL Bank is targeting to build a strong regional business from FY10 and beyond.
♦ Timeline extended further for EON Cap’s EGM. Separately, HL Bank announced yesterday that it had agreed
to EON Cap’s request to extend the deadline for its EGM to 30 Sep from 20 Aug. This was on the back of EON
Cap’s decision to postpone its EGM, in compliance with the consent order of the High Court in relation to a suit
filed by a minority shareholder. However, the deadline of 30 Nov 2010 set to obtain all approvals from BNM/MOF
(MOF nod given on 26 Jul), shareholders of EON Cap and HL Bank and the SC and acceptance of the offer by EON
Cap remains unchanged.
Risks
♦ Risks to our view. The risks include: 1) slower-than-expected loan growth; 2) deterioration in asset quality; 3)
changes in market conditions that may adversely affect investment portfolio; and 4) exchange rate fluctuation of
RMB.
Forecasts
♦ Forecasts. We have raised our FY11-12 net profit forecasts by 11-14.8% largely after: 1) lowering our credit
cost assumptions to around 20bps p.a. (31-37bps previously); and 2) a reduction in our effective tax rate
assumptions to 18-19% (from 25.7% p.a.). Our annual gross DPS projections of 24 sen, however, are kept
unchanged. We introduce our FY13 numbers.
♦ Fair value raised, recommendation upgraded. The earnings revision above has lifted our fair value to
RM10.70 from RM9.20, based on unchanged target CY11 PER of 15x. Consequently, we have upgraded our
recommendation to Outperform from market perform. Positive factors include earnings momentum picking up
while loan growth momentum was sustained, strong asset quality (which would help keep LLP benign), improving
contribution from BoC and strong and “high quality” capital ratios (helps minimise concerns on the impact of
Basel III). HL Bank’s offer to acquire EON Cap’s assets and liabilities (if successful) is a good deal for HL Bank
given the cheap acquisition price, in our view, and would propel the bank from the sixth largest to the fourth
largest bank in Malaysia in terms of total assets. Pending its completion, our numbers have yet to reflect this
acquisition.
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20 August 2010
Non-interest Income 129.0 128.7 107.4 (16.6) (16.7) Lower qoq due to MTM losses of RM15.6m in 4Q10 vs.
RM18.6m gains in 3Q10, partly cushioned by trading
gains of RM8m (3Q10 loss: RM2.4m).
Less: Overhead (223.8) (240.5) (227.2) (5.5) 1.5 Lower qoq mainly due to higher personnel costs (-
Expenses 9.8% qoq).
Less: Loan Loss (91.5) (34.6) (4.5) (87.0) (95.1) Lower due to:
Provisions 1. Lower SP of RM59.8m (3Q10: RM72.8m; 4Q09:
RM95.8m); and
2. Higher SP write-back of RM51.4m (3Q10:
RM26.1m; 4Q09: RM16.4m).
Associates 28.9 27.0 58.2 >100 >100 From 20%-owned Bank of Chengdu, China.
Pretax Profit 207.5 260.0 345.1 32.7 66.3
Less: Tax (8.6) (32.1) (44.0) 37.3 >100 Below statutory tax rate due to effective tax planning.
Effective Tax Rate 4.1 12.3 12.8
(%)
Net Profit 198.9 228.0 301.1 32.1 51.4
Source: Company, RHBRI
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20 August 2010
Non-interest Income 536.6 496.4 (7.5) Mainly due to lower forex gain of RM106.5m (FY09: RM174.6m) and higher
(+ Impairment MTM losses of RM20.8m (FY09 gain of RM28.9m), partly offset by impairment
losses on securities) writeback of RM6.9m (FY09: impairment charge of RM32.9m) and stronger
trading income (RM56.4m vs. FY09: RM30.6m).
Operating Income 2,066.0 2,063.9 (0.1)
Less: Overheads (876.6) (916.5) 4.6 Higher mainly due to personnel (+5.4% yoy) and admin (+11.5% yoy) costs.
Pre-provision 1,189.5 1,147.4 (3.5)
Profit
Less: LLP (156.7) (105.0) (33.0) Lower mainly due lower net SP charge of RM160m vs. RM242m in FY09.
Credit charge off rate was 19bps vs. 39bps while net NPL formation was
461bps vs. 540bps.
Operating Profit 1,032.8 1,042.4 0.9
Associates 99.5 142.9 43.7 Mainly from 20%-owned Bank of Chengdu, China.
Pretax Profit 1,132.2 1,185.3 4.7
Less: Tax (227.6) (197.3) (13.3) Effective tax rate was low due to certain tax free income.
Effective Tax Rate 20.1 16.6
(%)
Net Profit 904.6 988.0 9.2
Source: Company, RHBRI
Margins (%)
Yields On Earning Assets 4.27 3.71 3.26 3.33 3.35 3.26 3.28
Avg. Cost of Funds 2.44 2.10 1.77 1.67 1.64 1.66 1.59
Interest Spread 1.83 1.60 1.48 1.67 1.72 1.60 1.70
Net Interest Margins (ex-Islamic Inc) 1.96 1.73 1.60 1.79 1.84 1.73 1.82
Adjusted Net Interest Margins (+ Islamic Inc) 2.17 1.91 1.92 2.04 2.09 1.94 2.05
Profitability (%)
ROE 19.2 15.0 14.0 15.9 14.9 14.9 19.1
ROA 1.32 1.04 1.00 1.20 1.14 1.12 1.43
Cost / Income Ratio 38.5 44.4 45.3 41.1 45.4 47.3 43.8
Expenses / Avg. Assets 1.11 1.09 1.12 1.07 1.22 1.18 1.08
Provisions / Avg. Net Loans 0.30 0.33 1.07 0.49 0.26 0.38 0.05
Liquidity (%)
Loan Deposit Ratio 52.6 50.5 51.5 55.1 53.5 54.2 54.1
Net Loan Growth (qoq) (1.0) (2.1) 2.8 1.0 0.7 3.2 3.1
Deposit Growth (qoq) 2.3 1.8 1.0 (5.7) 3.8 1.9 3.4
Source: Company, RHBRI
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20 August 2010
Net Interest Income 1,567.5 1,653.7 1,721.8 1,814.9 Asset Quality (%)
(+ Islamic Banking) Gross NPL 1.78 1.66 1.56
Non-interest Income 496.4 530.6 557.1 584.9 Net NPL 1.17 1.09 1.02
Operating Income 2,063.9 2,184.3 2,278.9 2,399.8 SP / NPL 35.0 35.0 35.0
GP / Net Loans 1.51 1.51 1.51
Less: Overhead Loan Loss Coverage 119.0 125.0 130.8
Expenses (916.5) (962.3) (1,010.4) (1,060.9) Core Capital Ratio 9.6 10.1 10.7
Pre-provision RWCAR 9.7 10.2 10.9
Profit 1,147.4 1,222.0 1,268.5 1,338.9
Margins (%)
Less: Loan Loss Yields On Earnings Assets 3.28 3.23 3.20
Provisions (105.0) (119.8) (128.8) (131.9) Avg. Cost Of Funds 1.67 1.67 1.65
Operating Profit 1,042.4 1,102.1 1,139.7 1,207.0 Interest Spread 1.61 1.56 1.55
Un-adj NIM (ex-Islamic Inc) 1.74 1.68 1.67
Associates 142.9 150.0 157.5 165.4 Adjusted NIM (+Islamic Inc) 1.98 1.94 1.93
Pretax Profit 1,185.3 1,252.2 1,297.2 1,372.5
Profitability (%)
Less: Tax (197.3) (225.4) (246.5) (274.5) ROE 15.1 13.9 13.1
Effective Tax Rate 16.6 18.0 19.0 20.0 ROA 1.17 1.11 1.09
(%) Cost / Income Ratio 44.1 44.3 44.2
Profit After Tax 988.0 1,026.8 1,050.7 1,098.0 Expenses / Avg. Assets 1.10 1.07 1.06
Provisions / Avg. Net Loans 0.31 0.31 0.30
Minorities (0.0) 0.0 0.0 0.0
Net Profit 987.9 1,026.8 1,050.7 1,098.0 Liquidity (%)
Source: Company data, RHBRI estimates Loan Deposit Ratio 54.2 54.2 54.2
Net / Gross Loan Growth 7.1 7.0 5.0
Deposit Growth 7.0 7.0 5.0
Source: RHBRI estimates
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IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.
RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.
“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.
This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.
The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Stock Ratings
Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.
Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.
Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.
Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.
Industry/Sector Ratings
Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.
This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.
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