Hong Leong’s MSS a surprise: AllianceDBS

PETALING JAYA: The move by Hong Leong Bank Bhd (HLB) and Hong Leong Islamic Bank Bhd (HLIB) to reduce operational costs through a staff mutual separation scheme (MSS) is a surprise, considering the fact that their cost-to-income ratio of 45% is the second lowest in the industry, AllianceDBS Research Sdn Bhd said.
On Tuesday, HLB and HLIB offered a voluntary MSS to its employees, making it the latest in a list of banks that have undergone or are going through job cuts amid the challenging economic environment.
In a research report yesterday, AllianceDBS said the bank’s MSS is expected to be completed by the end of November, and the costs should be booked in the quarter endind December.
“Loan growth has surprisingly been holding up well but competitive pressures and repricing of loans coupled with weak deposit growth and aggressive deposit campaigns to shore up liquidity has further exerted pressure to earnings,” it said.
It said that the rising loan-to-deposit ratio is another indicator to watch.
“A slate of capital raising activities (HLB, HLFG and RHB Capital) would further dent industry return of equities (ROEs). Non-performing loans (NPLs) remain on the watch list,” Alliance DBS Research said in its note yesterday.
AllianceDBS said Public Bank and HLB remain its top picks as both have the advantage of a strong credit culture and liquidity.
Meanwhile, Maybank IB Research said while HLB’s cost-to-income ratio of 45% compares well against an industry average but it is still a distant second to Public Bank’s 30%. “There is room, therefore, for further cost efficiencies,” it said.
HLB’s latest MSS will be its second such scheme in four years, having put through a voluntary separation scheme (VSS) in 2012 following its merger with EON Bank in May 2011.
HLB’s VSS in FY12 had cost the bank about RM114 million and involved about 1,200 staff. At present, HLB’s Malaysian operations employ close to 9,500 staff.
“Assuming a 10% acceptance rate and a proportionately similar structure to the FY12 VSS, HLB’s MSS could cost the bank about RM90 million (3% of FY16 pretax profit).
“We estimate potential savings under this scenario to be about RM78 million per annum moving forward. This would lower our projected FY17 cost-to-income ratio to 40.8% from 42.6% and raise our FY17 net profit by 2.7%.”
“We estimate an uplift in HLB’s entity common equity tier 1 (CET1) ratio to 11% from 8% end-Jun 2015 from its upcoming RM3 billion rights issue, but with the expectation that its FY16 ROE would dilute to 11.7% from 13.2%,” it added.
Maybank IB maintained its “buy” call on HLB, with an unchanged target price of RM15.20.