AmWatch - Hong Leong Bank : Unanticipated boost from a solid deposit franchise BUY

STOCK FOCUS OF THE DAY

Hong Leong Bank : Unanticipated boost from a solid deposit franchise    BUY

We upgrade our rating on Hong Leong Bank Bhd (HLBB) to BUY from HOLD, with a higher fair value of RM17.10/share (from RM15.90/share previously). We have rolled forward our base year to FY15F, with our fair value now based on an ROE of 14.5% for FY15F (from 14.5% for FY14F previously) and an unchanged fair P/BV of 2.0x.

We believe that there is room for NIM enhancement ahead for HLBB. Base lending rate has been adjusted upwards by the same quantum of 25bps across the board by most banks following the recent rate hike, but what have been largely ignored are the different rates of adjustment for deposit rates. While bigger banks such as Maybank and PBB have raised fixed deposit rate by 23bps to 24bps, HLBB’s hikes has been much lower, averaging at only 15bps.

We believe that HLBB may not need to raise its board rate aggressively due to two key reasons. First is HLBB’s relatively low LDR, with HLBB being ranked the best in terms of LDR among all the banks. Secondly, HLBB has the highest proportion of contribution to deposits by individuals, which makes up 52.3% of its total deposit. For the other banks, it ranges between 27% and 45%.

On that basis, we are assuming a lower rate of increase for fixed deposit for HLBB, at 20bps instead of 25bps for each round of rate increase. Note that our assumption is on the conservative side, given HLBB’s recent increase of only 15bps on average. Purely on this adjustment, our earnings is upgraded by 4.7% for FY15F and 12.2% for FY16F (assuming another 25bps rate hike in December 2014).

HLBB’s share price had barely budged in the past two years. We believe that this is due to concerns over its low banking entity CET1 ratio (on a fully-loaded basis) as well as recent speculation that HLBB may need to do a rights issue. A possible 1-for-12 basis translates to a possible new fair value of RM16.30/share FY15F on an ex-rights basis.

Others :

Press Metal : Beneficiary of rising aluminium prices and premiums           BUY

RHB Capital : Key variations from merger scenarios          HOLD

CIMB Group : Piecing together a new merger scenario   HOLD

Malaysia Building : Securing a niche spot in the potential mega-merger HOLD

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