RHB Investment Research Reports

Hong Leong Bank - Transitioning To The Next Phase; BUY

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Publish date: Fri, 01 Sep 2023, 10:23 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

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  • BUY, new MYR23.20 TP from MYR22.60, 16% upside with c.3% yield. Hong Leong Bank’s 4QFY23 (Jun) results met expectations, albeit with a mixture in target achievements – it met its FY23 targets for loan growth, asset quality and CASA but missed on NIM, CIR and ROE. New Group Managing Director Kevin Lam shared his early thoughts and plans for the group – which we regard as sensible and should pan out to be positive over the longer term, if successfully executed. For the near term, we still like HLBK for its above-industry loan growth, while keeping asset quality solid and its balance sheet liquid.
  • 4QFY23 results in line, with net profit of MYR865m (-7% QoQ, -5% YoY) bringing FY23 net profit to MYR3.8bn (+16% YoY) – 99% of our and consensus FY23F earnings. The sequential drop in net profit was mainly due to lower non II, down 41% on lower realised trading gains and FX contribution, and negative JAWS as opex rose 5% QoQ due to some top-ups in accruals now that negotiations for the collective agreement (CA) is done. NIM, however, was surprisingly resilient (+1bp QoQ) despite 4% QoQ deposit growth. Positively, we note CASA gained traction – rising 8% QoQ.
  • FY23 ROE was 11.8%, marginally short of the >12% ROE target while CET-1 ratio of 12.8% was lower against 13.4% in FY22 due to the conversion of Bank of Chengdu’s (BOCD) convertible bond into shares (c.70bps impact). A final DPS of 38 sen (4QFY22: 37 sen) was declared, missing expectations as HLBB opted to conserve capital following the above BOCD investment and for growth. FY23 DPS was 59 sen (32% payout vs FY22: 55 sen, 35% payout).
  • FY24 guidance: i) loan growth of 6-7%; ii) NIM of 1.8-1.9% (8-18bps compression YoY, but stable vs 4QFY23); iii) CIR <40%; iv) GIL <0.7%; v) credit cost of c. 10bps; vi) CASA mix >30%; and vii) ROE c. 12%. We think the targets are broadly achievable, but believe non-II will need to strengthen significantly from 4Q levels to help meet the ROE target.
  • Charting the path ahead. The new group managing director intends to build upon the group’s existing strength in retail/SME, digital as well as credit underwriting standards. HLBK has done well on the lending side, but Lam believes more can be done to take a fair wallet share – which includes deposits, trade, cash and, especially, wealth management given HLBK’s relationship with SME owners. Apart from that, he thinks the China-ASEAN flows hold good promise, as well as the Singapore-Johor corridor.
  • Other highlights. BOCD’s 1H23 net profit rose 25% YoY on 26% YoY loan growth while GIL was stable at 0.7% (LLC: 512%). ROE was 19%. Developers account for 7% of loans, and HLBB remains comfortable with the list of borrowers. Also, the property market in Chengdu appears to be more resilient.
  • We made minor changes to our FY24-25 projections after updating our model for the full-year results. We raised our TP to MYR23.20 from MYR22.60 after rolling forward valuations to end-2024. Our TP has a parity ESG premium/discount applied, as HLBK’s ESG score of 3 out of 4 is level with the country median.

Source: RHB Securities Research - 1 Sept 2023

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