HLB-EON merger to produce long term benefit, says research

Analysts are upbeat that the new merged entity between Hong Leong Bank and EON Bank will benefit in the long run.

Hong Leong Bank's earnings for the financial year ended June 30 missed consensus estimates by 8% due to expenses incurred in its merger, which pushed its net profit down to RM1.14bil from RM1.17bil.

Merger-related expenses totalling RM111mil had diminished EON Bank's RM72mil profit contribution and put a squeeze on HLB's balance sheet.

For the fourth quarter ended June 30, HLB's net profit dipped 2.1% to RM297mil versus RM303mil last year. Its consolidated net profit for FY11, however, grew 12.5% year-on-year to RM1.14bil from RM1.01bil in FY10.

Revenue for the year increased 21.9% to RM2.45bil from RM2.09bil in the previous year.

CIMB Research said in a report that short-term earnings risks arising from the merger included management distraction as well as possible attrition of key managers and customers.

Post-merger, HLB has more than doubled its loan base from last year to RM84.2bil.

According to Kenanga Research, HLB's total loan portfolio now consists of 44% property loans, 21% hire -purchase loans and 21% working capital loans.

CIMB noted that the biggest increase was recorded in auto loans, up a staggering 259% y-o-y as EON Bank is a big player in this segment.

Residential mortgages, HLB's area of strength, also advanced 86% y-o-y.

HLB's assets mix, now more diversified, ballooned 1.7 times y-o-y to RM145.4bil. It sprang to become the country's fourth largest banking group by assets, from sixth place, after the merger.

Kenanga said: “Apart from cost synergies, we also believe the combination of HLB's strong deposit franchise and EON's high utilisation of funds could lead to top-line synergies with improving net interest margin.”

CIMB said that with the significant boost in HLB's net loans post-merger, the bank's loan-to-deposit ratio in the fourth quarter rose to a more optimal 71.4% from 54.1% a year ago.

“We view this as one of the key benefits of the acquisition as it puts HLB's excess liquidity to more efficient use, leading to higher yields for the merged entity,” CIMB added.