Net interest margin has widened some 11 bps qoq. The 90bps YTD decline
in 3-mth SIBOR has correspondingly led to lower time deposit rates. As HLF
depends primarily on time deposits for its funding (HLF does not take in savings
deposits), this has contributed to significantly lower cost of funds. On the other
hand, yields have not deteriorated much. Firstly, car loans (25% share of
portfolio) continue to record effective lending rates of 5-6%, similar to those 3
years ago. Secondly, housing mortgages (20% share of portfolio) recorded
good yields as the rates increase on a tiered basis. HLF dished out significant
HDB loans in 4Q05, and the tiered repricing of these loans have contributed to
stronger yields for HLF.
Expect wide NIM going ahead. A fair bit of time deposits were placed
between Nov 06 and Mar 07 (before SIBOR trended down). As most of the time
deposits are placed for 12 months, these have largely not been repriced yet.
With repricing expected to take place from now till Mar 08, HLF could record
even more savings in funding costs.
Higher average loan balance for 2008 to drive net interest income. HLF
recorded a strong 27% yoy loan expansion in 3Q07, with 7ppt of the growth
coming from the acquisition of the ABN Amro car hire-purchase portfolio. HLF
also sees a lot of residential housing loans to be drawn down over the next 12-
18 months, as residential property projects are completed (HLF has committed
significant housing loans to buyers of the City Square). We can expect a much
higher average loan balance for 2008 (versus 2007), which will contribute to
HLF’s net interest income.
Trading at a low P/NTA valuation. With a NTA of S$3.18/share, HLF is only
trading at 1.2x P/NTA. This is low relative to the P/RNTA of 2x average for the
3 Singapore banks. We have factored a discount for HLF (given its much
smaller asset base) – our fair P/NTA valuation for HLF is 1.6x, which gives a
price target of S$5.00.
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