ACROSS THE BOARD: Photo shows the Hong Leong building in Singapore. Post merger with EBG, the bank has transformed from a niche retail banking model to a universal bank with significant market shares across all segments.
KUCHING: Hong Leong Bank Bhd (HLB) has been regarded as riding high with its recent acquisition of EON Bank Group Bhd (EBG), with particular strength in Hire Purchase (HP) and small and medium enterprises (SMEs) divisions.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) and HwangDBS Vickers Research Sdn Bhd (HwangDBS Research), in their respective research reports, were of the opinion that the banking group had transformed from a niche retail banking model to a universal bank with significant market shares across all segments.
Kenanga Research stated, “There is plenty to like for HLB, especially after the merger. Its traditional banking business is a niche in retail and small-business banking with 190 branches in Malaysia.”
“HLB has the niche to succeed in the long-run, coupled with the addition of EBG, this business of the enlarged banking group has gone from as a niche bank and to become a universal bank with significant market shares across all segments.”
HwangDBS Research commented, “HLB will reap strong synergies from the EBG merger, via improved efficiencies, higher NIMs (net interest margins), and larger presence in HP and SMEs.
“One of the key levers is the business banking unit that focuses on small and medium enterprises, which is now more scalable with EBG’s base.”
With the close relationship with car dealers and small-business owners, the combined organisation was now one of the largest in Malaysia with 12.5 per cent market share in HP business (compared with 3.9 per cent on a standalone basis) and 9.2 per cent in SME business (compared with 3.2 per cent earlier).
“HLB now offers strong domestic organic growth coupled with a positive twist in its 20 per cent associate, Bank of Chengdu, which remains in growth mode in consumer, SME and local corporates, and also continuously building its deposit franchise,” HwangDBS opined.
The research house also noted HLB’s pure commercial banking business which offers a defensive play away from volatile market-related income, while its low eight per cent foreign shareholding (as at June 2011) would shield it from a major selldown in times of de-leveraging.
Loan-to-deposit ratio for the enlarged group was registered at 75 per cent as of end-June 2011, suggesting a massive lending capacity in the future.
Like all other competitive banks, the lending capacity of a bank is derived from the gathering of deposits. Post merger, the group sits on RM114.9 billion deposits in total with 9.5 per cent market share, out of which 24 per cent are current accounts savings accounts (CASA), the lowest cost of funds for a bank and tend to remain with the same bank for a long period of times.
This stable source of funding would allow HLB to participate in various lending activities and to earn outsize returns.
The bank was targeting for higher than industry loan growth of 12 per cent to 14 per cent year-on-year in capturing market share. It is also aiming to increase its fee-incomes growth in improving its return-on-assets.
With regard to HLB’s future outlook, Kenanga Research stated, “We remain optimistic, but despite retaining our optimistic expectations on HLB’s earnings, arising from both revenue and cost synergies as well as balance sheet expansions, we somewhat believe that the share price has already factored in the expected strong earnings growth.”
HwangDBS Research stated, “Net interest margin (NIM) will trend up in financial year 2012 (FY12) with the full consolidation of EBG’s higher yielding loans (only two months consolidation in FY11). Subsequently, NIM should trend down due to competitive pressure.
“We remain bullish on enlarged entity. Our FY12 to FY14 earnings estimates now consolidate EBG’s numbers. As an enlarged entity, we imputed 11 per cent and nine per cent loan and deposit growth over FY12 to FY14 forecasts.”
Kenanga Research maintained HLB’s target price pegging of RM12.50 per share based on 2.3 times price to book value and 15.6 times price earnings ratio.
HwangDBS Research raised the target price to RM16 per share, not taking into account the the pricing of HLB’s RM2.6 billion rights issue which should be out by next week.