Hong Leong Bank Bhd
(Oct 20 RM14.20)
Maintain buy with target price of RM16.20: What Hong Leong Bank offers is a bank that is second to Public Bank in terms of efficiency and asset quality, prudent management and a strong deposit franchise.

Sticky retail deposits make up a massive 51% of Hong Leong Bank’s customer deposit base (industry average: 40%), and resultantly, its funding cost is the second lowest in the industry after Malayan Banking Bhd.

Moreover, valuations are not demanding — Hong Leong Bank trades at a prospective calendar year 2015 price-earnings ratio (PER) of just 11 times versus 14.7 times for Public Bank.

This translates into a Calendar Year (CY) 15 price-to-book value of just 1.6 times for a return on equity (ROE) of 14.6% versus a PER of 2.3 times for Public Bank (ROE: 16.6%).

It is a given that the bank will eventually have to shore up its capital base but based on our estimates, the amount it would have to raise could be quite manageable at just RM1billion for a common equity tier 1 ratio of 10%, if it disposes of its pool of treasury shares to part fund the capital exercise.

Operationally, we still expect loan growth to trend around 7% financial year 2015 (FY15) but positively, the July 2014 overnight policy rate (OPR) hike has allowed the bank to maintain its net interest margin.

Its 20%-owned Bank of Chengdu (BoC) could however see slower earnings momentum ahead as it moderates loan growth and as investment income tapers off.

We have thus cut our earnings forecasts for BoC, resulting in a trimming of our FY15-17 earnings forecasts for Hong Leong Bank by 2% per annum. — Maybank IB, Oct 20

This article first appeared in The Edge Financial Daily, on October 21, 2014