Hong Leong Bank Bhd
(April 1, RM13.22)
Maintain buy with a lower target price of RM16.20: Given the global economic uncertainties brought about by the Covid-19 pandemic, Hong Leong Bank Bhd (HLB) fits our preference for banks with strong asset quality and robust capital strength that will better withstand economic downcycles. With its share price down 22% year to date, the stock’s price-to-book value has derated to 1 times, from 1.4 times in early January 2020, pricing in risks from Bank of Chengdu Co Ltd.

RHB economists now forecast gross domestic product growth to drop to 0% year-on-year (y-o-y) in 2020 (2019: +4.3% y-o-y) and rebound by a sharp 5.7% y-o-y in 2021, aided by the government’s RM250 billion economic stimulus package. We expect Bank Negara Malaysia (BNM) to cut the overnight policy rate (OPR) by another 50 basis points (bps) to 2% in the first half of 2020 (1H20), before raising it back to 2.5% in 1H21 as the economy recovers from the fourth quarter of 2020 onwards.

On March 24, BNM announced additional measures for borrowers affected by the Covid-19 pandemic – an automatic moratorium on loan repayments to individuals and small and medium enterprises (SMEs) for six months from April 1; encouraging banks to extend similar moratoriums to corporate customers; and allocating special relief funds for SMEs. Collectively, these measures will give affected borrowers an immediate reprieve and the much needed breathing space to reassess their financial positions.

The suspension in ageing of loan accounts during the six-month period, coupled with the banks’ commitment to facilitate the resumption of repayments post-moratorium, should help preserve asset quality and prevent a spike in impairment charges. Like all banks, HLB will experience asset quality stress during this economic downturn, but the rise in its gross impaired loans (GILs) should be manageable, given the solid quality of its loan book. HLB’s GIL ratio was at a low 0.84% in December 2019, versus the 2.5% peak during the global financial crisis. We have conservatively factored in a higher credit cost of 11bps (from 9bps) for FY21F (forecast) and 8bps (from 6bps) for FY22F.

Based on our OPR expectations, banks with financial years ending December will see net interest margins (NIMs) narrow in FY20F, before recovering in FY21F. As its financial year ends in June, HLB should see relatively stable NIMs in FY21, with the full impact from another 50bps OPR cut in 1H20 mitigated by the 50bps rate hike in 1H21.

Taking into account our revisions in key assumptions, our net profit estimates for the group remain unchanged for FY20F, but are lowered by 4-5% for FY21F-22F. — RHB Research Institute, April 1