hong leong bank report 160311

Price RM13.20

Fair Value RM11.70

52-week High/Low RM14.32/RM11.89

Key Changes

Fair value

EPS

YE to Jun FY15 FY16F FY17F FY18F

Total income (RM mil) 4,066.9 4,371.4 4,691.3 5,027.9

Core net profit (RM mil) 2,233.2 2,142.0 2,379.0 2,756.7

FD Core EPS (sen) 118.8 98.8 109.7 127.2

FD Core EPS growth (%) 6.2 (16.8) 11.1 15.9

Consensus Net Profit (RM mil) - 2,023.0 2,382.1 2,593.4

DPS (sen) 41.0 41.0 41.0 41.0

BV/share (RM) 8.93 9.13 9.84 10.71

PE (x) 11.1 13.4 12.0 10.4

Div yield (%) 3.1 3.1 3.1 3.1

P/BV (x) 1.5 1.4 1.3 1.2

ROE (%) 14.3 11.7 11.6 12.4

Stock and Financial Data

Shares Outstanding (million) 1,879.9

Market Cap (RMmil) 24,814.7

Book Value (RM/share) 8.93

P/BV (x) 1.5

ROE (%) 14.3

Major Shareholders Hong Leong Financial Group

(63.5%)

Employees Provident Fund (13.6%)

Free Float 50.0

Avg Daily Value (RMmil) 12.1

Price performance 3mth 6mth 12mth

Absolute (%) - 1.9 (3.7)

Relative (%) (2.5) (2.7) 1.9

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

HLBK MK FBMKLCI Index

FINANCIAL SERVICES

HONG LEONG BANK (HLBK MK EQUITY, HLBB.KL) 11 Mar 2016

Further clarity on asset quality trend

Company report HOLD

Rachel Huang

[email protected]

03-2036 2293

(Maintained)

Rationale for report: Company result

Investment Highlights

We maintain our HOLD rating on Hong Leong Bank Bhd

(HLBB) with an unchanged fair value of RM11.70/share.

Our fair value is fully diluted for the proposed rights issue,

and is based on an unchanged fully-diluted ROE of 10.8%

FY16F, leading to an unchanged fair P/BV of 1.2x.

Recall there was an increase in working capital impaired

loans in its latest results releases recently. We understand

the relatively large increase of RM40.8mil QoQ (+11.8%

QoQ), in the gross impaired loans for working capital

segment, was due mainly to two major accounts

amounting to a total of about RM30mil, which was inherited

from its merger in 2011.

Thus, the impaired loans do not fully reflect HLBB’s still

conservative credit assessment policy. HLBB assured that

these loans were secured, and it has made sufficient loan

loss provisioning in accordance with regulations.

The company further reiterated that the second

consecutive quarter of upticks seen in the residential

mortgage segment was due mainly to impact from

implementation of the guideline on reclassification and

restructured (R & R) loans. Based on our estimates, these

are mostly provided for in it 1HFY16 YTD. This is based on

a comparison of R & R related credit costs, to the net new

increase in impaired loans for the residential mortgage,

personal loans and credit cards on a quarterly basis.

This confirms HLBB’s indication that it has remained made

sufficient loan loss provisioning in line with regulations.

This was despite the drop in loan loss cover to 125.5% in

2QFY16, from 131.0% in 1QFY16.

We would prefer the company to have retained a its

previous high loan loss cover of above 130% for buffer

purposes given the slowing macro environment, although

we do acknowledge that its loan loss cover remains one of

the highest in the industry.

While we are reassured by the clarity provided, our view

remains that the latest asset quality trend has not been as

impeccable as our high expectations previously, although

this was influenced partly by HLBB’s excellent historical

track record in the past.

Nevertheless, we are positive on the clarity. We also like

the company’s greater transparency on its oil and gas

loans exposure, which was only RM502mil, the company

informed at its briefing. This is compared to previous

broad indication of less than 1% (less than RM1,178.8mil)

of total gross loans. We maintain HOLD.

Hong Leong Bank 11 Mar 2016

AmInvestment Bank Bhd 2

SECOND CONSECUTIVE QUARTER OF UPTICK

IN IMPAIRED LOANS

Recall that HLBB’s gross impaired loans balance continued

to rise, by a relatively large 4.8% QoQ in 2QFY16

(1QFY16: +2.0% QoQ).

This came mainly from the working capital segment, apart

from upticks in the residential mortgage, personal loans

and credit card segment.

Working capital increase was due largely to two

main accounts

We understand the relatively large increase of RM40.8mil

QoQ (+11.8% QoQ), in the gross impaired loans for

working capital segment was due mainly to two major

accounts amounting to a total of about RM30mil, which

was inherited from its merger in 2011. Thus, the impaired

loans do not fully reflect HLBB’s still conservative credit

assessment policy.

These two major accounts are not related to the oil and gas

segment although the company is not able to share which

segment these accounts are related to.

HLBB assured that these loans were secured, and it has

made sufficient loan loss provisioning in accordance with

regulations.

Retail segment upticks related mostly to R & R

The company further reiterated that the second

consecutive quarter of upticks seen in the residential

mortgage segment was due mainly to impact from

implementation of the guideline on reclassification and

restructured (R & R) loans.

Recall that the preceding 1QFY16’s increases in both the

residential and non-residential impaired loans were

attributed mainly to the impact from the R & R guideline (all

R & R loans required to be classified as impaired, which

came into effect for HLBB from 1QFY16 or 1 July 2015).

The company affirmed that the majority (more than 90%) of

its residential mortgage borrowers are owners occupiers, or

have a maximum of only two properties during the time of

loan application.

EXHIBIT 1: GROSS IMPAIRED LOANS DATA

Source: Company, AmInvestment Bank Bhd estimates.

Gross impaired loans (RMmil) 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 QoQ

% chg

YoY

% chg

Purchase of securities 0.7 0.6 0.2 0.2 0.2 0.0 (67.0)

Purchase of transport vehicles 233.8 214.1 184.1 183.5 170.1 (7.3) (27.3)

Landed properties - residential 205.5 229.7 207.2 242.1 250.2 3.4 21.7

Landed properties - non residential 40.9 36.6 46.2 53.6 51.5 (3.9) 25.8

Personal use 32.3 32.7 34.7 35.9 40.9 13.9 26.8

Credit card 45.6 41.7 42.9 46.2 55.2 19.6 21.2

Purchase of consumer durables 0.0 0.0 0.0 0.0 0.0

Construction 19.7 5.5 4.1 4.0 6.8 68.9 (65.6)

Working capital 404.1 359.8 365.4 345.9 386.6 11.8 (4.3)

Merger and acquisition 0.0 0.0 0.0 0.0 0.0

Other purpose 33.1 31.5 28.9 26.4 24.6 (6.7) (25.5)

Total gross impaired loans 1,051.6 987.7 948.0 967.1 1,013.4 4.8 (3.6)

Gross impaired loans ratio (%) 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16

Purchase of securities 0.1% 0.1% 0.0% 0.0% 0.0%

Purchase of transport vehicles 1.3% 1.2% 1.0% 1.0% 0.9%

Landed properties - residential 0.5% 0.5% 0.5% 0.5% 0.5%

Landed properties - non residential 0.3% 0.3% 0.3% 0.4% 0.3%

Personal use 0.9% 0.9% 1.0% 1.0% 1.1%

Credit card 1.1% 1.0% 1.1% 1.2% 1.4%

Purchase of consumer durables 0.9% 0.9% 1.0% 0.0% 0.0%

Construction 1.9% 1.6% 1.6% 1.4% 1.6%

Working capital 1.9% 1.6% 1.6% 1.4% 1.6%

Merger and acquisition 0.0% 0.0% 0.0% 0.0% 0.0%

Other purpose 1.3% 1.2% 1.2% 1.1% 1.1%

Total gross NPL ratio 1.0% 0.9% 0.8% 0.8% 0.9%



Larger pace of increase in personal loans and

credit cards also due to R &R

There was also a larger pace of QoQ increase in personal

loans (2QFY16: + RM5.0mil; 1QFY16: +RM1.2mil and

credit cards (2QFY16: +RM9.1mil, +1QFY16: RM3.3mil)

gross impaired loans, in this quarter.

The company indicated that these were mostly due to

impact from reclassification of R & R loans.

The pace of increase of R &R loans are slowing

down in 2QFY16

However, the net new increase in impaired loans for the

residential mortgage, personal loans and credit cards

slowed down on a quarterly basis, to RM22.2mil (total of

these three segments) in 2QFY16, from RM39.3mil in

1QFY16.

R & R related credit costs was 6bps YTD

The company alluded that the additional loan loss

provisioning from R & R loans amounted to 6bps YTD

(1QFY16: 4bps).

This worked out to loan loss provisioning expense for R &R

of RM70.2mil YTD in 1HFY16.

Or, on a quarterly basis, there was a loan loss provisioning

expense for R& R loans of RM24.3mil in 2QFY16 vs.

RM45.94mil.

Most of the net new R & R have been mostly

provided for

If we were to compare the R & R related credit costs, to the

net new increase in impaired loans for the residential

mortgage, personal loans and credit cards on a quarterly

basis, we find that most of the net new impaired loans

relating to residential mortgage, personal loans and credit

cards from the R &R guideline has been fully provided for,

based on our estimates.

This confirms HLBB’s indication that it has remained made

sufficient loan loss provisioning in line with regulated

requirements.

We are positive on company’s transparency in

terms of oil and gas exposure

The company had earlier provided further details on its oil

and gas exposure, which currently stands at only

RM502mil in total, most of which are from the downstream

players.

The impaired loans related to the oil and gas remained

small at only RM3mil in total.

We are positive on further transparency and precise

indications on its oil and gas exposure, as HLBB had

previously indicated that its exposure was less than 1%

(1% of gross loans worked out to RM1,178.8mil).

EXHIBIT 2: GROSS IMPAIRED LOANS TREND (QUARTERLY BASIS)

Source: Company, AmInvestment Bank Bhd estimates. .

1,78

1

1,75

3

1,72

1

1,53

2

1,48

1

1,38

5

1,32

9

1,35

9

1,33

4

1,34

1

1,26

2

1,23

2

1,19

5

1,05

2

988

948

967 1,01

3

2.1 2.0 2.0

1.7 1.6

1.5 1.4 1.4 1.4 1.3

1.2 1.2 1.1

1.0 0.9

0.8 0.8 0.9

-

0.5

1.0

1.5

2.0

2.5

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

1QFY12 2QFY12 3QFY124QFY121QFY13 2QFY133QFY134QFY13 1QFY142QFY143QFY14 4QFY14 1QFY152QFY15 3QFY15 4QFY151QFY162QFY16

(%)(RMmil) Gross impaired loans (RMmil) (RHS) Gross impaired loans ratio (%) (LHS)



DECLINE IN LOAN LOSS COVER

Recall the loan loss cover has softened in this quarter, to

Loan loss cover was allowed to slide further, to 125.5% in

2QFY16, compared with 131.0% in 1QFY16

The company reiterated that it remains conservative and

made full loan loss provisioning in requirement with

regulations.

MAINTAIN HOLD

While we are reassured by the clarity provided, we think

the latest asset quality trend in terms of the overall uptick in

impaired loans, is not as excellent, or as strong as we had

hoped for, although this was influenced partly by HLBB’s

excellent historical track record.

Nevertheless, we are positive that the company had been

unexpectedly more transparent in its latest disclosure of its

oil and gas exposure, which was only RM502mil, as

informed during its briefing. This is compared to previous

indication of less than 1% (less than RM1,178.8mil) of total

gross loans.

We maintain HOLD.

EXHIBIT 3: LOAN LOSS COVER

Source: Company, AmInvestment Bank Bhd estimates.

137.

8

141.

9

149.

0

133.

4

134.

3

139.

2

141.

1

131.

3

130.

4

127.

5

129.

3

128.

9

128.

7

129.

7

127.

7

136.

3

131.

0

125.

5

110.0

115.0

120.0

125.0

130.0

135.0

140.0

145.0

150.0

155.0

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16

(%) Loan loss cover (%)



EXHIBIT 4: FINANCIAL DATA

Income Statement (RMmil, YE 30 Jun) FY14 FY15 FY16F FY17F FY18F

Net interest income 2,662.2 2,741.2 2,850.3 3,065.1 3,287.6

Non-interest income 942.5 906.0 1,067.7 1,136.6 1,211.5

Islamic banking income 434.4 419.8 453.3 489.6 528.8

Total income 4,039.1 4,066.9 4,371.4 4,691.3 5,027.9

Overhead expenses (1,792.2) (1,813.9) (1,780.3) (1,717.3) (1,770.3)

Pre-provision profit 2,246.8 2,253.1 2,591.1 2,974.1 3,257.6

Loan loss provisions (52.1) 51.9 (280.7) (299.3) (202.2)

Impairment & others 39.8 23.5 - - -

Associates 378.6 417.7 357.7 389.0 511.5

Pretax profit 2,613.2 2,746.2 2,668.1 3,063.7 3,567.0

Tax (511.0) (513.0) (526.1) (684.7) (810.3)

Minority interests - - - - -

Net profit 2,102.3 2,233.2 2,142.0 2,379.0 2,756.7

Core net profit 2,102.3 2,233.2 2,142.0 2,379.0 2,756.7

Balance Sheet (RMmil, YE 30 Jun) FY14 FY15 FY16F FY17F FY18F

Cash & deposits with FIs 14,712.8 6,230.3 10,100.2 13,297.0 16,571.6

Marketable securities 44,353.0 54,959.2 50,500.7 49,219.1 49,606.5

Total current assets 59,065.8 61,189.5 60,600.8 62,516.1 66,178.1

Net loans & advances 102,579.1 112,124.1 121,543.5 130,902.3 141,471.2

Statutory deposits nm nm nm nm nm

Long-term investments 3,150.6 3,476.2 5,434.5 5,773.8 6,201.9

Fixed assets 725.6 678.6 692.2 706.0 720.1

Intangible assets 2,179.1 2,149.4 2,149.4 2,149.4 2,149.4

Other long-term assets 2,650.6 4,402.0 4,517.3 4,638.3 4,765.4

Total LT assets 111,285.0 122,830.3 134,336.9 144,169.7 155,307.9

Total assets 170,350.8 184,019.7 194,937.7 206,685.8 221,486.0

Customer deposits 130,252.3 140,276.1 148,733.2 157,871.3 169,497.9

Deposits of other FIs 7,111.3 7,096.2 7,096.2 7,947.8 8,901.5

Subordinated debts 6,820.4 6,560.9 5,860.9 5,860.9 5,860.9

Hybrid capital securities 3,085.4 5,475.1 5,583.0 5,695.8 5,813.7

Other liabilities 8,551.3 7,821.8 7,865.7 7,987.8 8,188.6

Total liabilities 155,820.6 167,230.1 175,139.0 185,363.6 198,262.7

Shareholders’ funds 14,530.2 16,789.6 19,798.7 21,322.2 23,223.4

Minority interests - - - - -

Key Ratios (YE 30 Jun) FY14 FY15 FY16F FY17F FY18F

Total income growth (%) 2.2 8.0 5.8 5.7 6.4

Pre-provision profit growth (%) 4.0 0.3 15.0 14.8 9.5

Core net profit growth (%) 13.3 6.2 (4.1) 11.1 15.9

Net interest margin (%) 2.0 1.9 1.9 1.9 1.9

Cost-to-income ratio (%) 44.4 44.6 40.7 36.6 35.2

Effective tax rate (%) 19.6 18.7 19.7 22.3 22.7

Dividend payout (%) 35.1 33.0 39.0 36.0 31.0

Key Assumptions (YE 30 Jun) FY14 FY15 FY16F FY17F FY18F

Loan growth (%) 7.2 8.0 8.7 8.2 8.0

Deposit growth (%) 5.4 7.7 6.0 6.1 7.4

Loan-deposit ratio (%) 79.3 80.4 81.8 83.5 84.4

Gross NPL (%) 1.2 0.8 0.9 0.9 0.9

Net NPL (%) 0.7 0.6 0.7 0.6 0.5

Credit charge-off rate (%) 0.1 - 0.2 0.2 0.1

Loan loss reserve (%) 128.9 136.3 137.6 151.2 168.2

Total CAR (%) 14.6 14.3 19.0 18.9 19.0

Tier 1 Ratio (%) 11.9 11.9 16.1 16.2 16.3

Source: Company, AmInvestment Bank Bhd estimates



Published by

AmInvestment Bank Bhd (23742-V) (A member of the Am Bank Group) 15 t h F l oo r B a ng un an A m B ank G r ou p 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 03 ) 207 0 - 2 44 4 ( r e s ea r c h ) F ax : ( 03 ) 207 8 - 3 16 2

Printed by

AmInvestment Bank Bhd (23742-V) (A member of the AmBank Group) 15 t h F l oo r B a ng un an A m B ank G r ou p 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 03 ) 207 0 - 2 44 4 ( r e s ea r c h ) F ax : ( 03 ) 207 8 - 3 16 2

The information and opinions in this report were prepared by AmInvestment Bank Bhd. The investments discussed or recommended in this

report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a

solicitation to buy any securities. The directors and employees of AmInvestment Bank Bhd may from time to time have a position in or with

the securities mentioned herein. Members of the AmBank Group and their affiliates may provide services to any company and affiliates of

such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are

reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not

represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise

from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to

change without notice.

For AmInvestment Bank Bhd

Benny Chew

SR VP Equity Research

hong leong bank report 160311

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