DBS‘ 17-cent drop yesterday to $13.36, and HONG LEONG FINANCE‘s 10-cent gain in 2 days to $2.40 is interesting.

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Media on both sides of the Causeway reported that a quid pro quo arrangement is being looked into by the 2 governments.

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The general view is that DBS will at last be able to “enter” Malaysia, either on its own or via an acquisition (reason for the price drop?).

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Malaysian banks will also be able to upgrade their limited licence in Singapore. (Malayan Bank is the only Malaysian bank with a qualifying full bank licence – allowed 25 service locations.)

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Another possible candidate for some consideration, we like to believe, is HLF under Kwek Leng Beng‘s chairmanship. A merger with Hong Leong Bank Sdn Bhd, controlled by his cousin brother Tan Sri Quek Leng Chan would make eminent sense.

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HLF has severely lagged the banks (see attachment below), which we would attribute to its unsteady dividend policy. It will get a significant boost.

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We are upgrading HLF to a BUY, largely because of its underperformance. A maintained dividend at 2010’s 12 cents would give a yield of 5%.

DBS‘ 17-cent drop yesterday to $13.36, and HONG LEONG FINANCE‘s 10-cent gain in 2 days to $2.40 is interesting.

•

Media on both sides of the Causeway reported that a quid pro quo arrangement is being looked into by the 2 governments.

•

The general view is that DBS will at last be able to “enter” Malaysia, either on its own or via an acquisition (reason for the price drop?).

•

Malaysian banks will also be able to upgrade their limited licence in Singapore. (Malayan Bank is the only Malaysian bank with a qualifying full bank licence – allowed 25 service locations.)

•

Another possible candidate for some consideration, we like to believe, is HLF under Kwek Leng Beng‘s chairmanship. A merger with Hong Leong Bank Sdn Bhd, controlled by his cousin brother Tan Sri Quek Leng Chan would make eminent sense.

•

HLF has severely lagged the banks (see attachment below), which we would attribute to its unsteady dividend policy. It will get a significant boost.

•

We are upgrading HLF to a BUY, largely because of its underperformance. A maintained dividend at 2010’s 12 cents would give a yield of 5%.

Trading below book value

HLF is trading at an attractively low P/B. We spoke with management recently. Management said their efforts to drive loans have led to a 4Q10 sequential loan increase. Though FY10 net interest margin is under pressure (due to competitive interest rates), we believe further squeeze is quite unlikely – we forecast continued soft SIBOR for at least the next six months, which should help to keep funding costs low. Further FY11 loan growth would drive preprovisioning earnings. Maintain BUY on HLF as valuation remains attractive. Our target price of S$3.61 is pegged to 1.0x 2011 book (7-yr historical P/B is 1.0x).

Loan growth momentum persisted in 4Q10. After the 2.9% 3Q10 QoQ loan expansion, loans grew a further 2.9% in 4Q10. For FY10, loans expanded 2.3%. Management highlighted the challenging car hire-purchase market (with vehicle units sold falling 40% in 2010), and this segment accounts for almost 25% of loan book. However, HLF saw more activities in the SME and housing loan segments.

We forecast 2011 loan growth of 8%. The car hire-purchase portfolio amortises with an average timeframe of 30 months. With unexciting COE numbers, car unit sales – and hence car loans, is seen to be lacklustre. However, the recent rise in car prices will offer some cushioning effect. HLF continues to provide housing mortgages, loans to developers and SMEs.

Expect growth in FY11 pre-provisioning profit. With the benign credit environment, HLF was able to write-back provisions in FY10. We have conservatively assumed that HLF will need to make provisions in FY11 to cater for loan growth. Consequently, our forecast of a growth in FY11 pre-provisioning operating profit will be followed by a decline in FY11 pre-tax profit.

Trading below book value

HLF is trading at an attractively low P/B. We spoke with management recently. Management said their efforts to drive loans have led to a 4Q10 sequential loan increase. Though FY10 net interest margin is under pressure (due to competitive interest rates), we believe further squeeze is quite unlikely – we forecast continued soft SIBOR for at least the next six months, which should help to keep funding costs low. Further FY11 loan growth would drive preprovisioning earnings. Maintain BUY on HLF as valuation remains attractive. Our target price of S$3.61 is pegged to 1.0x 2011 book (7-yr historical P/B is 1.0x).

Loan growth momentum persisted in 4Q10. After the 2.9% 3Q10 QoQ loan expansion, loans grew a further 2.9% in 4Q10. For FY10, loans expanded 2.3%. Management highlighted the challenging car hire-purchase market (with vehicle units sold falling 40% in 2010), and this segment accounts for almost 25% of loan book. However, HLF saw more activities in the SME and housing loan segments.

We forecast 2011 loan growth of 8%. The car hire-purchase portfolio amortises with an average timeframe of 30 months. With unexciting COE numbers, car unit sales – and hence car loans, is seen to be lacklustre. However, the recent rise in car prices will offer some cushioning effect. HLF continues to provide housing mortgages, loans to developers and SMEs.

Expect growth in FY11 pre-provisioning profit. With the benign credit environment, HLF was able to write-back provisions in FY10. We have conservatively assumed that HLF will need to make provisions in FY11 to cater for loan growth. Consequently, our forecast of a growth in FY11 pre-provisioning operating profit will be followed by a decline in FY11 pre-tax profit.

• HLF’s performance in Q3 continues to disappoint: net profit fell 22% to $25.385 mln, a sharp contrast from the banks.

• While the contraction of the car hire purchase business is a “reasonable” excuse, HLF’s push into SME sector has clearly not yielded any results.

• Loans & Advances, at $6103.53 mln at end Sept’10, are still lower than $6136.99 mln at end’09, which was down sharply from $7412.92 mln at end 2008. And net interest Income dropped 15% to $47.40 mln.

• Assuming unchanged final dividend of 6 cents, full year total will be 10 cents, giving a yield of 3.2%.

• While trading at 0.89x book of $3.46, investors would be better off switching to bank stocks.

• We maintain HLF may be worth a look again at $2.70-2.80.