We maintain our BUY call on Hong Leong Bank (HLBB) with an unchanged fair value of RM21.10/share. This is based on FY22 ROE of 10.9%, leading to P/BV of 1.3x. No changes to our earnings estimates.
We met up with the management in a virtual meeting recently for updates.
We understand that total loans under the outstanding payment relief assistance plan (PRAP) as of end-Aug 2021 stood at RM35.6bil vs. RM32.4bil in July 2021. These comprised loans to retail borrowers of RM26.3bil and SME & corporate borrowers of RM9.3bil.
Payment relief assistance was at a peak in July 2021. Since then, the increase in new loans under the PRAP has tapered. This alleviates concerns on the continued rise of new payment relief assistance that will require much higher top-ups in provisions in the form of management overlays.
We gather that loans to B40 retail borrowers accounted for 16.0% of HLBB’s retail loans. B40 makes up circa RM4.7bil or 18.0% of total retail loans that are under the PRAP.
Recently, the prime minister announced a loan repayment support programme (Urus) to B50 (borrowers with income of <RM5,880/mth). These included B40 borrowers with an income of <RM4,850/mth) and those in the lower income category in the M40 with an income of RM4,850– RM5,880/mth.
The options of assistance available under this programme are: i) 3 months of interest waiver or ii) 3 months of interest waiver together with reduced instalments for 24 months and lower interest rates for unsecured personal loans/financing and credit cards.
To be eligible for the loan repayment support programme, individual applicants must be: i) from the B50 income segment (income of <RM5,880/mth); ii) either unemployed or experienced a decline in income by 50.0%; and iii) have loans/financing of not more than 90 days in arrears at the time of application.
Applicants can start applying for the loan repayment assistance starting from 15 Nov 2021 to 31 Jan 2022.
We see the impact from the 3-month interest waiver to be manageable with no significant dent on the group’s earnings. Stringent parameters have been put in place to determine the eligibility of applicants. These included verification by banks to ensure that the applicants are either unemployed or have suffered a 50.0% reduction in monthly salary as well as the requirement that they need to already be in a repayment assistance programme (TRA, Pemerkasa, Pemulih, bank’s R&R or others) before 1 October 2021. This eliminates the chance for opportunistic borrowers to take advantage of the assistance offered under Urus. With the announcement of finer details on the mechanism for the assistance programme, we now expect the impact from the interest waiver to be milder than our earlier projection of RM54mil for HLBB.
On the Pemulih moratorium, management alluded to the recognition of a mod loss of RM31mil up until Aug 2021. This amount is likely to be reported in the upcoming 1Q22 results.
1Q22 is likely to see further top-ups in management overlays but not significant in amount.
Despite the trend of tapering new payment relief assistance from the peak in July 2021, the group is likely to remain prudent and maintain the conservative provision buffers built up since FY20.
Write-backs in management overlays are only likely in 1H23 with more clarity on the containment of the pandemic and no further lockdown measures disrupting the repayment capacity of borrowers.
Management alluded to some FD campaigns recently for the tenures of 6, 9 and 12 months. The deposit competition is not as intense yet. However, this could change moving forward with the sector gradually facing keener deposit competition as banks continue to optimize their deposit mix to the max while allowing their LD ratios to rise. Besides, new funding from securities is likely to be pricier ahead as MGS yields continue to climb with the market anticipated to price in rate hikes.
On interest rates, no change in the OPR is expected for the rest for 2021. In 2022, management sees a potential rate hike of 25bps to 2.00% from 1.75% in 2H 2021. Typically, an OPR increase of 25bps will improve the group’s NIM by 2–3bps.
In view of the potential further rise in MGS yields ahead, gains from the further monetization of FVOCI securities will be limited unlike previous quarters. However, this will be mitigated by the improvement in other sources of NOII such as wealth management fees and fees from the card business with the pickup in retail spend. Besides, the improving outlook in provisions will also be supportive of the group’s earnings.
The group has submitted its application to participate in Dow Jones Sustainability Indexes and the outcome is expected to be known by Nov 2021.
On its associate Bank of Chengdu’s (BOC) raising of funds via convertible bonds to increase its CET1 ratio, we gather that the application has been submitted to the authorities in China and is pending approval.
Meanwhile, the group does not have any lending exposures (directly or indirectly) to Evergrande in China. On a comforting note, BOC’s exposure to the real estate and construction sectors in China is not significantly large, standing at circa 7% and 3% respectively.
