Exposure to Hong Leong Bank loans to vulnerable sectors is minimal

Hong Leong Bank Bhd
(April 2, 13.14 RM)
Maintain purchase with unchanged fair value of RM15.90 per share:
This is based on Hong Leong Bank Bhd (HLB) return on equity for fiscal year 2021 (FY21) of 9.7%, leading to a price to book (P / BV) ratio of 1.1 times. We do not change our estimates.

HLB organized a conference call to take stock of the measures announced by Bank Negara Malaysia to deal with the Covid-19 pandemic.

We understand that the ringgit liquidity of the banking system is still plentiful. In terms of the liquidity of the US dollar, tensions have been observed in the previous weeks, but the situation has improved recently. The group has exposure to US dollar loans and bonds equivalent to RM 3.6 billion.

HLB’s total loans stood at Ringgit 141 billion at the end of December 2019 – Ringgit 40 billion was loans to small and medium enterprises (SMEs) (small SMEs: Ringgit 4 billion), while loans to Individuals accounted for nearly 100 billion ringgit or 68.4% of its total loans. . Personal loans consisted largely of Ringgit 70 billion in mortgages and Ringgit 3.5 billion in outstanding credit cards. For its mortgage portfolio, the average loan-to-value ratio (LTV) is around 79%, with most loans between RM250,000 and RM750,000.

About 82% of mortgages are for the purchase of a first home. About 50% of mortgages are made for the purchase of completed residential properties, the remainder for the acquisition of properties under construction. Some 80% of mortgage borrowers have monthly incomes over RM3,000.

Management stressed that 90% of the group’s domestic borrowers would opt for the moratorium to defer repayments for six months – 86% of retail and SME borrowers and 4% of commercial / corporate (non-SME) borrowers. This week, the group received requests from 10,000 borrowers to withdraw from the moratorium, including 5% of its 8,000 to 8,500 SME borrowers who have chosen to continue with their existing payments.

HLB’s account managers will actively call on SME borrowers from the riskiest segments. The question is whether the six-month moratorium is adequate or whether they require their facilities to be restructured and reprogrammed. In order to alleviate the short-term liquidity shortage of SME borrowers, Special Relief Facilities (SRF) will offer a maximum limit of RM 1 million per SME at an effective financing rate of 3.5% per annum. We understand that the earned spread of the SRF is attractive at 3% while the credit risk will be mitigated with up to 80% of the loan secured by Credit Guarantee Corp Malaysia Bhd or Syarikat Jaminan Pembiayaan Negara Bhd. To date, approximately RM 141 million of the FRU has been approved for 175 SME borrowers and another 315 are in preparation.

The moratorium will not result in an increase in the ratio of impaired loans and provisions as there will be no deterioration in the timing of loans during this period. Taking into account the moratorium which will be granted from April 1 with a resumption of payments from October 1 and with the end of HLB’s financial year in June, the cost of the FY20 credit should remain stable. Any increase in provisions is unlikely to occur until FY21.

HLB has a minimum exposure to loans to the oil and gas sector of 580 million ringgit (0.4% of total loans). Only RM 217 million of loans to this segment were identified as being strongly impacted by the fall in oil prices. During this time, he has no loan exposure to airlines.

Its exposure to loans to the most vulnerable sectors, including tourism and hospitality, is 2.4 billion ringgit (less than 2% of its total outstanding loans). On tourism and hotels, the group has a loan exposure of 396 million ringgit.

Foreign loans represent only 5.5% or 7.7 billion RM of the group’s total funding. – investment bank, April 2

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