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Tuesday, May 10, 2011

Hong Leong Bank - Raising RM2.6bn via rights


Rights issue size raised to RM2.6bn.
Hong Leong Bank has proposed to raise the rights issue size to RM2.6bn (from RM1.6bn) to further strengthen its capital base and for working capital purposes. The issue price will be fixed
at a later date, at 15%-35% discount to the theoretical exrights price, and the exercise should to be completed by 1QFY12. Given the larger rights issue of RM2.6bn, EPS in FY12 could be neutral to mildly negative, depending on the discount attached to the rights. In our FY12 proforma, we assumed 20% discount and it is EPS neutral. EPS would be accretive in FY13.
Sustainable growth.
3Q11 net profit of RM290m (flat qoq) was in line. 9M11 earnings were 73% of our full year
FY11 forecast. Net interest income was led by 2% loan growth, while NIM was flat at 1.77%. Non-interest income fell 17% qoq mainly due to lower fee income and foreign exchange gains. YTD loans grew 11%. Loan growth was mainly driven by personal loans (+8% qoq), mortgage
(+3% qoq) and working capital loans (+4% qoq). Asset quality remained robust with gross NPL ratio improving to 1.9% against 2Q11’s 2.1%, while absolute NPL amount fell 7% in the quarter. Contribution from Bank of Chengdu was RM57m (+29% qoq) or 16% of Group PBT. Tier-1 CAR and RWCAR are both at 12%.

Maintain Buy and RM15 TP.
Given a stronger balance sheet and greater financial muscle, Hong Leong Bank would be able to look at non-organic growth beyond Malaysia to meet its regional aspirations. Our RM15 target
price is based on the Gordon Growth Model and proforma estimates, with the following assumptions: 18% ROE, 5% long term growth and 9.4% cost of equity.

Report from HWangDBS

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