This article first appeared in The Edge Financial Daily on April 3, 2020

Hong Leong Bank Bhd
(April 2, RM13.14)
Maintain buy  with an unchanged fair value of RM15.90 per share: This is based on Hong Leong Bank Bhd’s (HLB) financial year 2021 (FY21) return on equity of 9.7%, leading to a price-to-book value (P/BV) of 1.1 times. We make no changes to our estimates.

HLB organised a conference call to provide updates on the measures announced by Bank Negara Malaysia to address the Covid-19 pandemic.

We understand that the ringgit liquidity in the banking system is still ample. In terms of liquidity of the US dollar, some stress has been seen in earlier weeks, but the situation has improved recently. The group has an exposure to US dollar loans and bonds equivalent to RM3.6 billion.

HLB’s total loans stood at RM141 billion as at the end of December 2019 — RM40 billion were loans to small and medium enterprises (SMEs) (smaller SMEs: RM4 billion) while retail loans made up close to RM100 billion or 68.4% of its total loans. The retail loans consisted largely of RM70 billion in mortgages and RM3.5 billion in outstanding credit cards. For its mortgage book, the average loan-to-value (LTV) is around 79% with most loans ranging between RM250,000 and RM750,000.

Around 82% of the mortgage loans are for purchasing first residential properties. About 50% of the mortgage loans are granted for the purchase of completed residential properties with the remaining for acquiring properties under construction. Some 80% of the mortgage borrowers have monthly incomes higher than RM3,000.

The management highlighted that 90% of the group’s domestic loan borrowers will be opting for the moratorium to defer repayments for six months — 86% of retail and SME borrowers, and 4% of commercial/corporate (non-SME) borrowers. This week, the group has received requests from 10,000 borrowers to opt out of the moratorium, including 5% of its 8,000 to 8,500 SME borrowers which have chosen to continue with their existing payments.

HLB’s relationship managers will be actively calling SME borrowers in the higher risk segments. This is to determine if the six-month moratorium is adequate or if they require their facilities to be restructured and rescheduled. To alleviate the short-term cash flow tightness of the SME borrowers, special relief facilities (SRF) will be offering a maximum limit of RM1 million per SME at an effective financing rate of 3.5% per annum. We understand that the spread earned from the SRF is attractive at 3% while credit risk will be mitigated with up to 80% of the loan guaranteed by either Credit Guarantee Corp Malaysia Bhd or Syarikat Jaminan Pembiayaan Negara Bhd. To date, about RM141 million of the SRF has been approved for 175 SME borrowers with another 315 in the pipeline.

The moratorium will not cause the impaired loan ratio and provisions to rise as there will be no deterioration in staging of loans during this period. In view of the moratorium that will be granted from April 1 with payments resuming from October 1, and with HLB’s financial year-end in June, FY20 credit cost is likely to remain stable. Any increase in provisions is likely to occur only in FY21.

HLB has minimal loan exposure to the oil and gas sector at RM580 million (0.4% of total loans). Only RM217 million loans to this segment have been identified as heavily impacted by the lower oil prices. Meanwhile, it has no loan exposures to airlines.

Its loan exposure to the more vulnerable sectors, including tourism and hotels, is RM2.4 billion (less than 2% of its total outstanding loans). On tourism and hotels, the group has a loan exposure of RM396 million.

Overseas loans make up only 5.5% or RM7.7 billion of the group’s total financing. — AmInvestment Bank, April 2