KUALA LUMPUR (Aug 30): CIMB IB Research has raised its target price for Hong Leong Bank Bhd to RM12.30, after lifting its financial year ending June 30, 2017 (FY17) and FY18 earnings per share (EPS) forecasts.

In a note Aug 30, the research house noted that so far this year, Hong Leong Bank has reduced its base rate by a net 15 basis points and pointed out that this would have a net positive impact on its earnings as the cut was smaller than the average of 23-basis-point reduction in fixed deposit rates.

"After factoring in the rate movements and 1% pt reduction in projected FY17 loan growth to 9%, we lift our FY17 to FY18 EPS forecasts by circa 1% and discount dividend model (DDM)-based target price to RM12.30," it said.

However, CIMB Research said Hong Leong Bank remains a "reduce", given the potential de-rating catalysts of lower contributions from Bank of Chengdu, an expected upturn in the credit-cost cycle, and unattractive valuations — calendar year 2017 (CY17) price earnings ratio (PER) of 12 times versus the sector's 11 times.

"We prefer RHB Bank Bhd for exposure to the sector. The upside risks to our target price are faster-than-expected recovery in contributions from Bank of Chengdu, and an upturn in loan growth, which will significantly rejuvenate its net profit growth in the coming quarters," it added.

Meanwhile, the research house said Hong Leong Bank's FY16 net profit was within expectations.

However, the full-year net dividend per share of 41 sen was above its projected 36 sen.

"FY16 net profit fell by 14.8% year-on-year, primarily due to some one-off items costs of RM173 million (US$42.5 million) for the mutual separation scheme (MSS) in FY16, gain on sale of building in FY15, and reversal of over-provision of tax in 4QFY15.

"Adjusting for these, its net profit would still have fallen in FY16 but by a smaller magnitude of 5.6%. The operating profit was dented by the reversal of credit cost from a net write-back of RM51.9 million (US$12.8 million) in FY15 to a provision of RM52.6 million (US$13 million) in FY16," it noted.

The research house said although Hong Leong Bank's loan growth weakened from 7.4% year-on-year in March 2016 to 6.3% year-on-year in June 2016, it was still above the industry's 5.6% pace.

"Gross impaired loan ratio was stable at circa 0.8% in March to June 2016 but loan loss coverage fell from 127.3% in March 2016 to 119.8% in June 2016," it said.

At 12.07am, Hong Leong Bank gained 4 sen or 0.3% to RM13.16 with 193,900 shares done, for a market capitalisation of RM27 billion.