HL Finance

HL Finance: BNP says HLF faces headwinds that could persist throughout FY12-13. Sees limited room for NIM to expand given HLF’s costly funding structure (heavy reliance on fixed deposits), which is set to persist given its limited mkt reach (28 branches, zero ATMs) and clientele profile (target ageing group of Sporeans).

Notes net interest income accounts for 95% of HLF’s operating income, hence the ability to grow loans is critical for HLF. While the house expects decent 12-15% loan growth in 2012-13, says HLF is constrained by, i) high LDR of 96%, ii) sizeable short term loans (1/3 of loan book) that need to be replenished quickly, and iii) heavy reliance (20% of total loans) on an increasingly tough car-loan business in view of curbs on car population growth.

Slashes EPS forecast by up to 18%, and expects ROE to slide to record low levels of 5%. Believes a turnaround in fortunes look remote under an increasingly competitive and heavily regulated mkt environment.
The house cuts TP to $2.42 from $3.05, based on 13x FY12E P/E. Reiterates Hold call despite HLF’s seemingly cheap valuation of 0.7x FY12E P/B.