Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Hong Leong Bank
Bloomberg: HLBK MK | Reuters: HLBB.KL
BUY RM6.60 KLCI : 1,218.80
Price Target : 12-Month RM 8.00
Potential Catalyst: Higher dividend payout, sustainable earnings
Analyst
Sue Lin Lim +603 2711 0971
suelin@hwangdbsvickers.com.my
Price Relative
7.40
6.90
6.40
5.90
5.40
4.90
4.40
RM
Relative Index
2005 2006 2007 2008 2009
Hong Leong Bank (LHS) Relative KLCI INDEX (RHS)
Forecasts and Valuation
FY Jun (RM m) 2009F 2010F 2011F 2012F
Pre-prov. Profit 1,222 1,352 1,480 1,654
Net Profit 905 954 1,043 1,170
Net Pft (Pre Ex.) 905 954 1,043 1,170
EPS (sen) 57.3 60.4 66.0 74.1
EPS Pre Ex. (sen) 57.3 60.4 66.0 74.1
EPS Gth Pre Ex (%) 20 5 9 12
Diluted EPS (sen) 57.3 60.4 66.0 74.1
PE Pre Ex. (X) 11.5 10.9 10.0 8.9
Net DPS (sen) 18.0 18.0 18.0 18.0
Div Yield (%) 2.7 2.7 2.7 2.7
ROAE Pre Ex. (%) 16.7 15.8 15.4 15.4
ROAE (%) 16.7 15.8 15.4 15.4
ROA (%) 1.2 1.2 1.2 1.2
BV Per Share (sen) 363 404 452 508
P/Book Value (x) 1.8 1.6 1.5 1.3
Earnings Rev (%): - - -
Consensus EPS (sen): 57.3 65.1 72.3
ICB Industry : Financials
ICB Sector: Banks
Principal Business: Banking and Finance
Source of all data: Company, DBS Vickers, Bloomberg
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Flight to quality
• On track for growth with resilient ROEs, good
asset quality and robust capital.
• On a regional expansion mode; its associate,
Chengdu Bank is already contributing to profits
just after a year since acquisition.
• Additional catalyst includes a possible capital
management play in future. Maintain BUY and
TP of RM8.00.
Strong operations. Hong Leong Bank’s strength is
derived from its strong deposit franchise and conservative
lending policies. Its lowest loan-to-deposit ratio among its
peers allows ample room for growth in the future. Aside
from its robust net interest income and NIM, operating
income is driven by trading and forex income, which has
proven sustainable given its solid treasury operations. Its
NIM was marginally lower in its recent financial year end
despite 75% variable rate loans and 55% fixed deposits,
after imputing the full impact of the OPR cuts, which
exemplifies the bank’s strong asset-liability management
amidst re-pricing and competitive pressures. Meanwhile,
capital ratios are robust with Tier-1 CAR and RWCAR at
14.7%, among the highest in the industry.
Improving earnings ahead. We expect Hong Leong
Bank to propel ahead with earnings improvement from
lower provision charge-off rates. NIM should remain flat at
1.8%, while non-interest income is expected to remain
strong. Its 19.99% associate, Chengdu Bank, made its full
year maiden contribution of RM100m in FY09 and we
expect further improvement. Hong Leong Bank is still
scouting for regional acquisitions. Its wholly-owned
banking subsidiary in Vietnam is expected to start
operations in Oct09. We do not discount a higher dividend
payout once it completes its regional acquisitions.
Attractive valuations. We believe Hong Leong Bank
offers attractive value proposition with a sustainable
15% ROE, in addition to a 3% stable dividend yield with
an upside potential. Maintain BUY with TP of RM8.00.
At A Glance
Issued Capital (m shrs) 1,580
Mkt. Cap (RMm/US$m) 10,429 / 3,004
Major Shareholders
Hong Leong Financial Group 63.5
Employees Provident Fund (%) 9.6
Free Float (%) 26.9
Avg. Daily Vol.(‘000) 865
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Refer to important disclosures at the end of this report
ed:LM / sa: WMT