Hong Leong Bank on track to hit FY17 targets

0

KUCHING: Hong Leong Bank Bhd (HLB) is believed by the research arm of Kenanga Investment Bank Bhd (Kenanga Research) to be on track to achieve the group’s financial year 2017 (FY17) targets, with cyclical headwinds looking subdued.

According to Kenanga Research, the bank’s focus on appropriate loan pricing coupled with prudent cost management and strategic cost management will continue to support its growth in 2017.

The research arm recapped that HLB’s FY17 targets were loans growth of four to five per cent, net interest margins (NIMs) to widen by five to 10 basis points (bps), cost to income ratio (CIR) to trend downwards to less than 46 per cent, credit charge ratio of 20bps to 35bps and return on equity (ROE) of between 10 to 11 per cent.

Kenanga Research noted that the widening NIMs in the second quarter of 2017 (2Q17) was encouraging, with NIMs expanding by six bps year on year (y-o-y) driven by prudent loan pricing and effective funding cost management.

Kenanga Research expected improving NIMs for FY17, driven by current account, savings account (CASA) ratio maintained (more than 25 per cent in 2Q17).

The research arm also expected improvement to be driven by cheaper treasury and wholesale funding coupled with lower fixed deposit (FD) rates thus lower funding costs with maturity of some deposits and capital instruments.

Additionally, the research arm noted that with strict loan pricing management (recall before the overnight policy rate (OPR) cut, HLB raised the rates for certain products like mortgages and auto loans, so essentially that sort of helped mitigate the 25 bps impact from OPR cut).

It further noted that loan pricing have been generally stable since the second half of current year 2016 (2HCY16) cut which support the widening NIMs for FY17.

“Although MFRS9 is expected to come into effect by January 1, 2018, we understand from management that full impact to its bottom-line will be significantly felt only in its FY19 profit and loss (P&L) statements due to its June financial year-end.

“From our understanding, loan loss provisions are likely to be higher by 20 to 30 per cent (based on the amount of provisions made in April 2016),” Kenanga Research said in a company update.

It added that this is only a preliminary assessment from Bank Negara Malaysia (BNM) with the full impact yet to be ascertained.

Based on Kenanga Research’s estimations, this will entail an additional provisioning of between RM250 million to RM370 million which will be adequately covered by its Regulatory Reserves (assuming that BNM allows the Reserves to be used to offset against the higher provisioning), which as end of December 2016 amounted to RM653 million.

The use of the Regulatory Reserves will impact HLB shareholders’ funds, lowering equity resulting in a decline in the group’s CET1 ratio by 20 to 30bps by the research arm’s estimates.