HLBANK (5819) - Hong Leong Bank - Assessing the impact of potential rights issue
Target RM13.00 (Stock Rating: REDUCE)
In our view, there is a possibility of Hong Leong Bank (HLB) embarking on a rights issue exercise to raise its fully-loaded CET1 ratio from 8.1%, one of the lowest among the local banks, to at least 10%. We estimate that such a rights issue would dilute HLB’s FY6/17 EPS by 6-7%, assuming RM1.9bn-2.4bn rights proceeds. We retain our DDM-based target price (COE of 10.6%; LT growth of 4%). HLB is still rated a Reduce, premised on (1) its below-industry loan growth, (2) weak fee income growth, and (3) upturn in credit costs. Also, the potential rights issue, if it happens, would be EPS-dilutive. We prefer RHB Capital.
What Happened
The purpose of this note is to gauge the dilutive impact of a potential rights issue on HLB’s EPS. During the bank’s conference call in Feb 15, management said that it has made capital management plans which, we gather from our industry sources as well as media reports, could involve a rights issue. On 6 Apr 15, HLB announced the proposed disposal of Menara Raja Laut for RM220m. This could be part of its capital management plan to boost capital ratios via the sale of non-core assets and the issuance of new equity.
What We Think
We have two scenarios for the possible magnitude of the rights issue (1) RM1.87bn to raise the bank’s CET1 ratio to 10% and (2) RM2.36bn to increase it to 10.5%. The new shares to be issued would account for about 8-10% of its share base. Based on our simulation, the potential rights issue would dilute HLB’s FY6/17 EPS by 6-7%, assuming RM1.9bn-2.4bn funds raised through the exercise. Other assumptions are (1) a 15% discount for the rights price, and (2) 3.5% interest rate for the new proceeds.
What You Should Do
While a rights issue would be dilutive for HLB’s EPS, it is not the main reason why we advise investors to reduce their exposure to the stock. We are more worried about its weak loan and fee income growth in 2015 as well as the impact of an expected upturn in credit costs.
Source: CIMB Daybreak - 15 April 2015
Target RM13.00 (Stock Rating: REDUCE)
In our view, there is a possibility of Hong Leong Bank (HLB) embarking on a rights issue exercise to raise its fully-loaded CET1 ratio from 8.1%, one of the lowest among the local banks, to at least 10%. We estimate that such a rights issue would dilute HLB’s FY6/17 EPS by 6-7%, assuming RM1.9bn-2.4bn rights proceeds. We retain our DDM-based target price (COE of 10.6%; LT growth of 4%). HLB is still rated a Reduce, premised on (1) its below-industry loan growth, (2) weak fee income growth, and (3) upturn in credit costs. Also, the potential rights issue, if it happens, would be EPS-dilutive. We prefer RHB Capital.
What Happened
The purpose of this note is to gauge the dilutive impact of a potential rights issue on HLB’s EPS. During the bank’s conference call in Feb 15, management said that it has made capital management plans which, we gather from our industry sources as well as media reports, could involve a rights issue. On 6 Apr 15, HLB announced the proposed disposal of Menara Raja Laut for RM220m. This could be part of its capital management plan to boost capital ratios via the sale of non-core assets and the issuance of new equity.
What We Think
We have two scenarios for the possible magnitude of the rights issue (1) RM1.87bn to raise the bank’s CET1 ratio to 10% and (2) RM2.36bn to increase it to 10.5%. The new shares to be issued would account for about 8-10% of its share base. Based on our simulation, the potential rights issue would dilute HLB’s FY6/17 EPS by 6-7%, assuming RM1.9bn-2.4bn funds raised through the exercise. Other assumptions are (1) a 15% discount for the rights price, and (2) 3.5% interest rate for the new proceeds.
What You Should Do
While a rights issue would be dilutive for HLB’s EPS, it is not the main reason why we advise investors to reduce their exposure to the stock. We are more worried about its weak loan and fee income growth in 2015 as well as the impact of an expected upturn in credit costs.
Source: CIMB Daybreak - 15 April 2015
