PP 7767/09/2010(025354)

26 April 2010

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
New s Upda te Company No: 233327 -M

26 April 2010
MARKET DATELINE

Hong Leong Bank Share Price

Fair Value
:
:
RM8.76
RM9.05
Proposing Capital Raising Exercise Of Up To RM3.4bn Recom : Market Perform
(Maintained)

Table 1 : Investment Statistics (HLBANK; Code: 5819) Bloomberg: HLBK MK

Net EPS Net Net
FYE PBT Profit EPS Gwth PER Book P/Book C.EPS* DPS Div Yld ROE
Jun (RMm) (RMm) (sen) (%) (x) (RM/s) (x) (sen) (sen) (%) (%)
2009 1,132.2 904.6 62.5 22.1 14.0 3.63 2.4 - 18.0 2.1 16.7
2010(f) 1,144.5 892.7 59.6 (4.7) 14.7 4.02 2.2 62.6 18.0 2.1 14.8
2011(f) 1,203.5 894.2 59.7 0.2 14.7 4.41 2.0 70.0 18.0 2.1 13.4
2012(f) 1,273.1 945.9 63.1 5.8 13.9 4.84 1.8 78.9 18.0 2.1 12.9
Main Board Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Issued Capital (m shares) 1,580.1

♦ The proposals. HL Bank announced on 23 Apr details on the proposed Market Cap (RMm) 13,841.7
acquisition of the entire assets and liabilities of EON Cap for RM5.06bn Daily Trading Vol (m shs) 0.9
(Proposed Acquisition). This is essentially the same as the revised offer 52wk Price Range (RM) 5.40 - 8.98
HL Bank made on 1 Apr 2010 and appears to put to rest EON Cap’s Major Shareholders: (%)
request that the offer includes some element of equity. HL Bank also Hong Leong Financial Grp 61.4
announced two capital raising exercises to strengthen its balance sheet, EPF 11.7
i.e.: 1) a renounceable rights issue to raise gross proceeds of up to
RM1.6bn (Proposed Rights Issue); and 2) the issuance of up to RM1.8bn FYE Jun FY10 FY11 FY12
of capital qualifying securities. The entitlement basis for the Proposed EPS chg (%) - - -
Rights Issue and the issue price will only be announced at a later date. Var to Cons (%) (4.9) (14.7) (20.1)

♦ Capital raising exercise not a surprise. HL Bank’s move to raise PE Band Chart
capital is not surprising as the Proposed Acquisition would result in FY10
Tier-1 and RWCAR ratios dropping to 6.3% and 8.3% from 16.6% and PER = 20x
PER = 15x
17.3% respectively. Assuming the maximum amount is raised from the PER = 10x
capital raising exercise, we estimate this would bring HL Bank’s Tier-1 and
RWCAR ratios back up to 11% and 13% respectively. These ratios, we
note, would be roughly within the range estimated for peers such as
Public Bank, CIMB and Maybank.

♦ Likely still EPS accretive, but ROE could be diluted. Based on the
last closing price and assuming the rights shares are priced at a 30-40% Relative Performance To FBM KLCI
discount to the theoretical ex-rights price (TERP), we estimate the above Hong Leong Bank
proposals could enhance HL Bank’s FY11-12 EPS by 5.5-12% (see Table
3). Such a discount range would be in line with the 30-35% TERP
discount for Axiata’s and Maybank’s rights issues last year. We do note FBM KLCI
that the number of rights shares to be issued is also dependent on the
movement in share price, i.e. should HL Bank’s share price fall below the
current price level, the number of rights shares that would have to be
issued (given a certain level of discount to TERP) would increase and vice
versa. Alternatively, the discount to TERP would have to be adjusted to
minimise the size of the new rights shares to be issued. As for the impact
on ROAE, our analysis suggests a potential dilution of up to 160bps. The
above analysis excludes potential merger synergies and integration costs.

♦ Approvals and time frame. The Proposed Acquisition and Rights Issue
are subject to approvals from BNM and shareholders, among others. The
Proposed Acquisition is expected to be completed by 4QFY06/10 while the
Proposed Rights Issue is expected to be completed by 1QFY06/11.

♦ Forecasts. No change to our earnings forecasts for now.

David Chong, CFA
(603) 9280 2186
♦ Investment case. No change to our fair value of RM9.05 (target CY10
david.chong@rhb.com.my
PER of 16x) and Market Perform call.

Please read important disclosures at the end of this report.

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Table 2 : Impact Of Proposals On Net Profit

FY06/11F FY06/12F Comments
HL Bank’s net profit RMm 894.2 945.9
EON Cap’s net profit RMm 397.7 445.6 Adjusted for HL Bank’s FYE.
RMm 1,291.9 1,391.5
Less:
Interest income foregone RMm (31.1) (31.1) Cash from internal funds @ 3-month KLIBOR rate
Incremental interest expense RMm (108.0) (108.0) Assume 8%.
Net profit after Proposals* RMm 1,152.8 1,252.3
chg 28.9% 32.4%
*The Proposals refer to the Proposed Acquisition, Proposed Rights Issue and issuance of capital qualifying securities.
Source: RHBRI estimates

Table 3: Impact Of Rights Issue On Financials

Discount To TERP (based on closing price of RM8.76)
10% 20% 30% 40%
No. of shares
-Existing (net of 81.1m treasury shares) m 1,499.0 1,499.0 1,499.0 1,499.0
-New shares to be issued under Proposed Rights Issue m 205.1 235.3 275.9 329.9
-Enlarged share base m 1,704.1 1,734.3 1,774.9 1,828.9
chg 13.7% 15.7% 18.4% 22.0%

EPS (FY11F)
-Current sen 59.7 59.7 59.7 59.7
-After Proposals sen 67.6 66.5 65.0 63.0
chg 13.4% 11.4% 8.9% 5.7%

EPS (FY12F)
-Current sen 63.1 63.1 63.1 63.1
-After Proposals sen 73.5 72.2 70.6 68.5
chg 16.5% 14.4% 11.8% 8.5%

ROAE (FY11F)
- Current 13.4% 13.4% 13.4% 13.4%
- After Proposals 13.6% 13.6% 13.6% 13.6%

ROAE (FY12F)
- Current 12.9% 12.9% 12.9% 12.9%
- After Proposals 11.3% 11.3% 11.3% 11.3%

Core capital ratio (FY10F)

- Current 16.6% 16.6% 16.6% 16.6%
- After Proposals 11.0% 11.0% 11.0% 11.0%

RWCAR (FY10F)
- Current 17.3% 17.3% 17.3% 17.3%
- After Proposals 13.0% 13.0% 13.0% 13.0%

Source: RHBRI estimates

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Table 4 : Earnings Forecasts Table 5 : Ratio Analysis & Forecast Assumptions

FYE Jun (RMm) FY09 FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F

Net Interest Income 1,529.5 1,550.4 1,629.6 1,699.3 Asset Quality (%)
(+ Islamic Banking) Gross NPL 2.24 2.14 2.02
Non-interest Income 536.6 575.2 597.7 627.6 Net NPL 1.31 1.27 1.22
Operating Income 2,066.0 2,125.6 2,227.3 2,326.9 SP / NPL 42.00 41.00 40.00
GP / Net Loans 1.54 1.54 1.54
Less: Overhead -876.6 -920.4 -966.4 -1,014.7 Loan Loss Coverage 110.19 112.38 115.62
Expenses Core Capital Ratio 16.58 17.01 17.43
Pre-provision 1,189.5 1,205.2 1,260.9 1,312.2 RWCAR 17.27 17.75 18.22
Profit
Margins (%)
Less: Loan Loss -156.7 -180.0 -182.8 -170.7 Yields On Earnings Assets 3.30 3.28 3.23
Provisions Avg. Cost Of Funds 1.67 1.67 1.67
Operating Profit 1,032.8 1,025.2 1,078.1 1,141.5 Interest Spread 1.63 1.61 1.56
Un-adj NIM (ex-Islamic Inc) 1.73 1.70 1.65
Associates 99.5 119.4 125.3 131.6 Adjusted NIM (+Islamic Inc) 1.98 1.96 1.92
Pretax Profit 1,132.2 1,144.5 1,203.5 1,273.1
Profitability (%)
Less: Tax -227.6 -251.8 -309.3 -327.2 ROE 14.4 13.46 12.98
Effective Tax Rate -20.1 -22.0 -25.7 -25.7 ROA 1.06 1.02 1.00
(%) Cost / Income Ratio 43.30 43.39 43.61
Profit After Tax 904.6 892.7 894.2 945.9 Expenses / Avg. Assets 1.12 1.10 1.08
Provisions / Avg. Net Loans 0.50 0.48 0.42
Minorities 0.7 0.0 0.0 0.0
Net Profit 905.3 892.7 894.2 945.9 Liquidity (%)
Source: Company data, RHBRI estimates Loan Deposit Ratio 50.51 50.54 50.58
Net / Gross Loan Growth 4.98 7.07 7.07
Deposit Growth 7.00 7.00 7.00
Source: RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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