Hong Leong sues Morgan Stanley over Pinnacle notes

Singapore finance firm alleges instruments were designed to fail in US bank’s favour

NEW YORK – Morgan Stanley was sued by Singapore’s Hong Leong Finance in federal court in Manhattan over claims it deceptively sold investments that were designed to fail.

Hong Leong alleged in a complaint filed today that it entered into a distribution agreement with the New York-based investment bank to sell about US$72.4 million (S$89.8 million) worth of the so-called Pinnacle notes to customers.

The notes later failed and the Singapore-based company was required to compensate customers for at least US$32 million in losses, according to the filing.

Morgan Stanley sold the notes as relatively safe investments while rigging them to fail for its own benefit, Hong Leong claimed.

“Morgan Stanley secretly, deceptively, and wrongfully invested the investors’ principal in very risky underlying assets,” according to the complaint, filed by Mr David S Stellings, a lawyer for Hong Leong.

A spokeswoman for Morgan Stanley declined to comment on the suit. BLOOMBERG

Weaker 1Q12 earnings on reversion to provisions

Sharp earnings decline due mainly to general provisions. HLF reported 1Q12 net profit of S$16.7m, down 37% YoY. Whilst pre-provisioning operating profit was down a less severe 12% YoY to S$21.3m, provisions of S$1.2m (versus 1Q11’s write-back of S$7.6m) contributed to the severe earnings contraction. We cut FY12 net profit forecast by 17% to S$67.2m to reflect the 1Q12 weakness, as well as expectations of continued weakness in net interest income, as pricing for lending products remained under pressure. On a positive note, loans expanded 6.3% and deposits rose 8.2% QoQ, reflecting the balance sheet growth. We maintain our target price of S$2.42, which is pegged to 0.65x book. Neutral recommendation re-iterated.

Loans and deposits both grew strongly. Loans rose 6.3% QoQ or 22.3% YoY to S$7.92b. Deposits rose 8.2% QoQ or 14% YoY to S$8.4b. The strong deposit growth is a positive, as it provides scope for further loan expansion going forward.

Target P/B is between historical average and crisis low. HLF trades at a historical average P/B of 0.95x. With the uncertain economic environment, we do not see any catalyst driving its share price to that level. The soft pricing for lending products will also reduce investors’ interest in HLF. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.

Higher QoQ earnings on more provision writeback

HLF reported 4Q11 net profit of S$24.7m, down 5.6% YoY, but up 11% QoQ. FY11 net profit of S$99.8m was above our S$93m forecast, due to more provisions writeback. HLF recorded a 5.2% QoQ expansion in loans, building on 3Q11’s 6.3%, which is a positive. We cut FY12 and FY13 net profit forecasts by 9% and 5% respectively to factor in weaker net interest income – management indicated that pricing for all categories of lending products continued to come under pressure. With concerns on slowing Singapore economic growth, we do not see any catalyst driving HLF share price up. Our target price of S$2.42 is pegged to 0.65x book. Maintain NEUTRAL.

Loans YoY expansion much stronger than deposit growth. Loans rose 5.2% QoQ or 18.7% YoY to S$7.45b. Deposits rose 6.0% QoQ or 8.1% YoY to S$7.76b. Although 4Q11 deposits’ growth is a positive versus 3Q11’s 2% sequential contraction, the stronger YoY loan growth versus deposits has translated to a higher loan deposit ratio. This could cap loan growth going forward.

Pre-provisioning operating profit contracted 1.5% QoQ. However, PBT was up 12% QoQ as provisions reversals doubled sequentially to S$7.1m.

Target P/B is lower than historical average. HLF trades at a historical average P/B of 0.95x. With the uncertain economic environment, we do not see any catalyst driving its share price to that level. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.

Higher QoQ earnings on more provision writeback

HLF reported 4Q11 net profit of S$24.7m, down 5.6% YoY, but up 11% QoQ. FY11 net profit of S$99.8m was above our S$93m forecast, due to more provisions writeback. HLF recorded a 5.2% QoQ expansion in loans, building on 3Q11’s 6.3%, which is a positive. We cut FY12 and FY13 net profit forecasts by 9% and 5% respectively to factor in weaker net interest income – management indicated that pricing for all categories of lending products continued to come under pressure. With concerns on slowing Singapore economic growth, we do not see any catalyst driving HLF share price up. Our target price of S$2.42 is pegged to 0.65x book. Maintain NEUTRAL.

Loans YoY expansion much stronger than deposit growth. Loans rose 5.2% QoQ or 18.7% YoY to S$7.45b. Deposits rose 6.0% QoQ or 8.1% YoY to S$7.76b. Although 4Q11 deposits’ growth is a positive versus 3Q11’s 2% sequential contraction, the stronger YoY loan growth versus deposits has translated to a higher loan deposit ratio. This could cap loan growth going forward.

Pre-provisioning operating profit contracted 1.5% QoQ. However, PBT was up 12% QoQ as provisions reversals doubled sequentially to S$7.1m.

Target P/B is lower than historical average. HLF trades at a historical average P/B of 0.95x. With the uncertain economic environment, we do not see any catalyst driving its share price to that level. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.

Hong Leong Finance profit falls 18%

HONG Leong Finance (HLF) posted a net profit of $99.8 million, down 18.2 per cent, for the 2011 full year, due to the low interest rate environment, the group said.

The company announced separately yesterday the appointment of former Cabinet minister Raymond Lim as an independent non-executive director from March 1. Mr Lim is currently a director of the Government of Singapore Investment Corporation (GIC) and also a senior adviser to John Swire & Sons (South-east Asia).

The 2011 net profit was helped by the reversal of provisions of $26.8 million, up 11.9 per cent. The last time net profit fell below $100 million was in 2008.

It posted earnings of $78 million then, down 41.5 per cent as it was affected by the $55 million provisions it had to set aside for settlements with customers who bought structured deposits that subsequently went into default.

HLF, Singapore’s biggest finance company, said that 2011 earnings per share fell to 22.65 cents from 27.7 cents. Final dividend was unchanged at eight cents per share.

Net loan assets grew 18.7 per cent during the year to end at $7.5 billion while deposits and balances of customers stood at $7.8 billion, up 8.1 per cent.

It said the growth of its loan book helped offset the pressure on pricing for lending products.

‘Pricing for all categories of lending products continued to come under pressure, although this was mitigated by the growth in loan book,’ it said.

For the full year, total interest income/hiring charges fell 13 per cent due to competition, it said.

A bright spot was in fee and commission income which improved by 19.7 per cent to $8.6 million due to higher fee income from some lending products and corporate advisory services.

Staff and other costs were also controlled; staff cost rose slightly, 1.9 per cent to $58.1 million and other operating expenses was up 4.8 per cent to $20.2 million.

HLF’s outlook for this year remains cautious as it sees the euro crisis spreading to more countries and weakness in the US and China affecting the rest of the Asian markets. It also said that new property measures announced recently would impact prices and slow down sales of residential properties in the near term. ‘We continue to exercise caution in this segment of the market,’ it said.

The stock ended unchanged yesterday at $2.45.