FINANCIAL SERVICES

HONG LEONG BANK

(HLBK MK EQUITY, HLBB.KL)

11 Mar 2016

Further clarity on asset quality trend

HOLD

Company report

(Maintained)

Rachel Huang
huang-teng-siang@ambankgroup.com
Rationale for report: Company result

03-2036 2293
Price
Fair Value
52-week High/Low

RM13.20
RM11.70
RM14.32/RM11.89

Investment Highlights

Key Changes
Fair value
EPS

YE to Jun

FY15

FY16F

FY17F

FY18F

4,066.9
2,233.2
118.8
6.2
41.0
8.93
11.1
3.1
1.5
14.3

4,371.4
2,142.0
98.8
(16.8)
2,023.0
41.0
9.13
13.4
3.1
1.4
11.7

4,691.3
2,379.0
109.7
11.1
2,382.1
41.0
9.84
12.0
3.1
1.3
11.6

5,027.9
2,756.7
127.2
15.9
2,593.4
41.0
10.71
10.4
3.1
1.2
12.4

Total income (RM mil)

Core net profit (RM mil)
FD Core EPS (sen)
FD Core EPS growth (%)
Consensus Net Profit (RM mil)
DPS (sen)
BV/share (RM)
PE (x)
Div yield (%)
P/BV (x)
ROE (%)

Stock and Financial Data

Shares Outstanding (million)

Market Cap (RMmil)
Book Value (RM/share)
P/BV (x)
ROE (%)

1,879.9
24,814.7
8.93
1.5
14.3

Major Shareholders

Hong Leong Financial Group

(63.5%)
Employees Provident Fund (13.6%)

Free Float
Avg Daily Value (RMmil)

50.0
12.1

Price performance

3mth

6mth

12mth

Absolute (%)
Relative (%)

(2.5)

1.9
(2.7)

(3.7)
1.9

16.0

2,000

14.0

1,800

1,600
12.0
1,400
10.0

1,200

8.0

1,000

6.0

800

600
4.0
400
2.0

200

0.0

Mar-11

Mar-12

Mar-13
HLBK MK

Mar-14

Mar-15

FBMKLCI Index

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 HLBBs 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 HLBBs 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 HLBBs excellent historical
track record in the past.
Nevertheless, we are positive on the clarity. We also like
the companys 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

EXHIBIT 1: GROSS IMPAIRED LOANS DATA

Gross impaired loans (RMmil)
Purchase of securities

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

QoQ
% chg

YoY
% chg

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

0.0

Purchase of consumer durables

Construction
Working capital
Merger and acquisition
Other purpose

0.0

0.0

0.0

0.0

19.7

5.5

4.1

4.0

6.8

68.9

(65.6)

404.1

359.8

365.4

345.9

386.6

11.8

(4.3)

0.0

0.0

0.0

0.0

0.0

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%

Source: Company, AmInvestment Bank Bhd estimates.

SECOND CONSECUTIVE QUARTER OF UPTICK

IN IMPAIRED LOANS
Recall that HLBBs 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 HLBBs still conservative credit
assessment policy.

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 1QFY16s 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.

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.
AmInvestment Bank Bhd

Hong Leong Bank

11 Mar 2016

Larger pace of increase in personal loans and

credit cards also due to R &R

Most of the net new R & R have been mostly

provided for

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.

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.

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

This confirms HLBBs indication that it has remained made

sufficient loan loss provisioning in line with regulated
requirements.

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.

We are positive on companys transparency in

terms of oil and gas exposure

R & R related credit costs was 6bps YTD

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 company alluded that the additional loan loss

provisioning from R & R loans amounted to 6bps YTD
(1QFY16: 4bps).

The impaired loans related to the oil and gas remained

small at only RM3mil in total.

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

of RM70.2mil YTD in 1HFY16.

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).

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

expense for R& R loans of RM24.3mil in 2QFY16 vs.
RM45.94mil.

EXHIBIT 2: GROSS IMPAIRED LOANS TREND (QUARTERLY BASIS)

Gross impaired loans (RMmil) (RHS)

(%)

800.0

1.4

1.3

1.2

1.2

1,013

1.5

1.0

1.1
1.0

600.0

967

1,232

1,262

1,341

1,334

1.4

948

1.4

988

1,000.0

1.5

1,052

1.6

2.0

1,195

1.7

1,200.0

1,359

1,481

2.0

1,329

2.0

1,385

1,400.0

2.1

Gross impaired loans ratio (%) (LHS)

2.5

1,532

1,600.0

1,721

1,800.0

1,753

2,000.0

1,781

(RMmil)

0.9

0.8

0.8

0.9

400.0

0.5

200.0
-

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

Source: Company, AmInvestment Bank Bhd estimates. .

AmInvestment Bank Bhd

Hong Leong Bank

11 Mar 2016

EXHIBIT 3: LOAN LOSS COVER

(%)

Loan loss cover (%)

125.5

131.0

136.3
127.7

129.7

128.7

128.9

129.3

127.5

130.0

130.4

131.3

135.0

134.3

133.4

140.0

137.8

145.0

139.2

141.9

150.0

141.1

149.0

155.0

125.0
120.0
115.0
110.0
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16
Source: Company, AmInvestment Bank Bhd estimates.

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 HLBBs
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.

AmInvestment Bank Bhd

Hong Leong Bank

11 Mar 2016

EXHIBIT 4: FINANCIAL DATA

Income Statement (RMmil, YE 30 Jun)

FY14

FY15

FY16F

FY17F

FY18F

2,662.2
942.5
434.4
4,039.1
(1,792.2)
2,246.8
(52.1)
39.8
378.6
2,613.2
(511.0)
2,102.3
2,102.3

2,741.2
906.0
419.8
4,066.9
(1,813.9)
2,253.1
51.9
23.5
417.7
2,746.2
(513.0)
2,233.2
2,233.2

2,850.3
1,067.7
453.3
4,371.4
(1,780.3)
2,591.1
(280.7)
357.7
2,668.1
(526.1)
2,142.0
2,142.0

3,065.1
1,136.6
489.6
4,691.3
(1,717.3)
2,974.1
(299.3)
389.0
3,063.7
(684.7)
2,379.0
2,379.0

3,287.6
1,211.5
528.8
5,027.9
(1,770.3)
3,257.6
(202.2)
511.5
3,567.0
(810.3)
2,756.7
2,756.7

FY14

FY15

FY16F

FY17F

FY18F

Cash & deposits with FIs

Marketable securities
Total current assets
Net loans & advances
Statutory deposits
Long-term investments
Fixed assets
Intangible assets
Other long-term assets
Total LT assets
Total assets
Customer deposits
Deposits of other FIs
Subordinated debts
Hybrid capital securities
Other liabilities
Total liabilities
Shareholders funds
Minority interests

14,712.8
44,353.0
59,065.8
102,579.1
nm
3,150.6
725.6
2,179.1
2,650.6
111,285.0
170,350.8
130,252.3
7,111.3
6,820.4
3,085.4
8,551.3
155,820.6
14,530.2
-

6,230.3
54,959.2
61,189.5
112,124.1
nm
3,476.2
678.6
2,149.4
4,402.0
122,830.3
184,019.7
140,276.1
7,096.2
6,560.9
5,475.1
7,821.8
167,230.1
16,789.6
-

10,100.2
50,500.7
60,600.8
121,543.5
nm
5,434.5
692.2
2,149.4
4,517.3
134,336.9
194,937.7
148,733.2
7,096.2
5,860.9
5,583.0
7,865.7
175,139.0
19,798.7
-

13,297.0
49,219.1
62,516.1
130,902.3
nm
5,773.8
706.0
2,149.4
4,638.3
144,169.7
206,685.8
157,871.3
7,947.8
5,860.9
5,695.8
7,987.8
185,363.6
21,322.2
-

16,571.6
49,606.5
66,178.1
141,471.2
nm
6,201.9
720.1
2,149.4
4,765.4
155,307.9
221,486.0
169,497.9
8,901.5
5,860.9
5,813.7
8,188.6
198,262.7
23,223.4
-

Key Ratios (YE 30 Jun)

FY14

FY15

FY16F

FY17F

FY18F

Total income growth (%)

Pre-provision profit growth (%)
Core net profit growth (%)
Net interest margin (%)
Cost-to-income ratio (%)
Effective tax rate (%)
Dividend payout (%)

2.2
4.0
13.3
2.0
44.4
19.6
35.1

8.0
0.3
6.2
1.9
44.6
18.7
33.0

5.8
15.0
(4.1)
1.9
40.7
19.7
39.0

5.7
14.8
11.1
1.9
36.6
22.3
36.0

6.4
9.5
15.9
1.9
35.2
22.7
31.0

Key Assumptions (YE 30 Jun)

FY14

FY15

FY16F

FY17F

FY18F

Loan growth (%)

Deposit growth (%)
Loan-deposit ratio (%)
Gross NPL (%)
Net NPL (%)
Credit charge-off rate (%)
Loan loss reserve (%)
Total CAR (%)
Tier 1 Ratio (%)

7.2
5.4
79.3
1.2
0.7
0.1
128.9
14.6
11.9

8.0
7.7
80.4
0.8
0.6
136.3
14.3
11.9

8.7
6.0
81.8
0.9
0.7
0.2
137.6
19.0
16.1

8.2
6.1
83.5
0.9
0.6
0.2
151.2
18.9
16.2

8.0
7.4
84.4
0.9
0.5
0.1
168.2
19.0
16.3

Net interest income

Non-interest income
Islamic banking income
Total income
Overhead expenses
Pre-provision profit
Loan loss provisions
Impairment & others
Associates
Pretax profit
Tax
Minority interests
Net profit
Core net profit
Balance Sheet (RMmil, YE 30 Jun)

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd

Hong Leong Bank

Published by
AmInvestment Bank Bhd (23742-V)
(A member of the Am Bank Group)
15th Floor Bangunan AmBank Group
55 Jalan Raja Chulan
50200 Kuala Lumpur
Tel: ( 0 3 ) 2 0 7 0 - 2 4 4 4 ( r e s e a r c h )
Fax: (03)2078-3162

11 Mar 2016

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.

Printed by
AmInvestment Bank Bhd (23742-V)
(A member of the AmBank Group)
15th Floor Bangunan AmBank Group
55 Jalan Raja Chulan
50200 Kuala Lumpur
Tel: ( 0 3 ) 2 0 7 0 - 2 4 4 4 ( r e s e a r c h )
Fax: (03)2078-3162

AmInvestment Bank Bhd

For AmInvestment Bank Bhd

Benny Chew
SR VP Equity Research