Sharp earnings decline due mainly to general provisions. HLF reported 2Q12 net profit of S$14.7m, down 44% YoY. Provision of S$3.5m is a reversal from 2Q11's provision write-back of S$8.5m, and the main contributor of earnings contraction. In addition, net interest income of S$37.3m was down 9% YoY, pointing to continued net interest margin squeeze amidst loan expansion. We expect 2H12 loan provisioning to lead to further YoY earnings weakness. We cut our FY12F net profit by 9% to S$61.4m to reflect the 2Q12 earnings weakness, as well as expectations of continued softness in net interest income, as pricing for lending products remained under pressure. On a positive note, loans expanded 5.9% and deposits rose 7% QoQ, reflecting the balance sheet growth. Maintain NEUTRAL with unchanged target price of S$2.42, pegged to 0.65x 2012 book.

Loan deposit ratio fell QoQ. With sequential deposit growth exceeding that of loans, loan deposit ratio fell 1 ppt QoQ to 93.3%. We view this positively as the strong deposit growth provides scope for further loan expansion going forward. However, management indicated that pricing for lending products remained under pressure.

Fee and commission income rose 16% QoQ. There was higher fee income from some lending products and corporate advisory services. HLF controlled staff and other costs well.

Target P/B is between historical average and crisis low. HLF trades at a historical average P/B of 0.94x. The soft lending yields and the uncertain economic environment will keep its share price below this historical average. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.

Source: OSK