HLBB needs RM2.2b capital for CET1 ratio requirement

PETALING JAYA: Hong Leong Bank Bhd may need to raise about RM2.2 billion for a 10% common equity tier 1 (CET1) ratio in compliance with Basel III requirements, but offsetting proceeds from the sale of its treasury shares would reduce the group's overall capital requirement to just RM1 billion, according to MaybankIB Research.
The minimum CET1 ratio required under Basel III is 7% by 2019 and assuming there is another 2.5% counter-cyclical buffer requirement, this would take the minimum ratio up to 9.5%.
The research house said an adequate CET1 ratio for now would therefore be 10% before taking into consideration any systematically important financial institutions requirements.
In fact, it said banks should be setting internal targets of 11% to 12%, to be more comfortable. Bank Negara Malaysia requires compliance with Basel III requirements at both the group and bank level.
"To attain a CET1 ratio of 10% at the bank level, Hong Leong Bank would have to raise about RM2.2 billion, by our estimates. Simultaneously, this would raise the group's CET1 ratio to a more comfortable 10.9%," MaybankIB Research said in a report yesterday.
"It is a given that the bank will eventually have to shore up its capital base but based on our estimates, the amount it would have to raise could be quite manageable at just RM1 billion for a CET1 ratio of 10%, if it disposed off its pool of treasury shares to part fund the capital exercise," it added.
MaybankIB Research said what Hong Leong Bank offers is a bank that is second to Public Bank Bhd in terms of efficiency and asset quality, prudent management and a strong deposit franchise. Sticky retail deposits make up a massive 51% of Hong Leong Bank's customer deposit base and resultantly, its funding cost is the second lowest in the industry after Malayan Banking Bhd.
It maintained its buy call on Hong Leong Bank with a RM16.20 target price.