Investment Highlights

• We maintain BUY on Hong Leong Bank (HLBB) with a revised fair value (FV) to RM20.90/share (previously RM20.30/share) to reflect a 3% premium to its share price following the upgrade in our ESG rating to 4 stars from 3. Our FV is based on FY22 ROE of 10.6%, leading to P/BV of 1.3x. We continue to like HLBB for its improving top line and NIM, stable asset quality as well as robust contribution from associates. We make no changes to our estimates.

• Management of HLBB held a briefing yesterday to provide an update on the bank’s approach towards sustainability and its key ESG initiatives.

• The sustainability approach focuses on 5 key pillars: i) Digital at the core (initiatives for digital banking, improving customer experience, safeguarding data privacy and mitigate cyber security risk); ii) Workforce readiness (training talented employees to newer roles and upholding ethics, integrity and compliance); iii) Socially responsible business (climate-positive financing, responsible and fair banking, sustainable supply chain with vendors adopting models and sustainable practices and prevention of financial crime); iv) Environmental management covering responsible consumption, coupled with the managing of environmental footprint; and v) Community investment (social responsibility to build an inclusive community and improve financial literacy, and providing support to social enterprises to be sustainable in their operations).

• To execute sustainable policies, procedure and practices, sustainable working groups have been formed. These groups are chaired by the group CFO and chief marketing and communication officer. A sustainable committee headed by the CEO oversees the working groups.

• In Oct 2019, HLBB committed to RM500mil in renewal energy financing for the next 4 years. To date, the group has already approved RM1bil of renewable energy financing (mainly solar, bioenergy and small hydro).

• The group’s business and corporate banking (BCB) division has already embedded ESG into its credit/lending practices. In July 2020, BCB rolled out its ESG policy and assessment framework which included an internal risk scoring system and sector specific guidelines. BCB has been engaging with its clients to embed sustainable business practices.

• BCB also collaborated with the Jeffery Sachs Center on Sustainable Development at Sunway University to train its frontliners and risk managers on ESG policies and principles.

• The group is ceasing lending to the coal and fire plants effective 1 July 2021. This reflects HLBB’s commitment to sustainability.

• On onboarding new customers, BCB screens potential borrowers to determine if they fall in the general exclusion list. Further to that, E&S (environmental & social) due diligence will be carried out if the customer falls under the low, medium or high E&S risk.

• From the initial sector screening carried out in Dec 2020, 18% of the BCB’s loan portfolio have been identified to be in the higher E&S risk category (7% in selected manufacturing, 6% in the palm oil industry, 3% in metals, mining and quarrying and 2% in non-renewable energy). On a comforting note, the remaining 82% are in the low to medium E&S risk. We gather that of the portfolio classified under the high E&S risk, 20% have completed the customer level E&S due diligence and half of these borrowers have been identified to be eligible for upgrade to either the low or medium risk rating. This is based on the group’s engagements with the borrowers, coupled with evidence of mitigation against sector E&S risk. The group launched its SME solar financing programme in Feb 2021. BCB continues to be actively involved in customer engagement programmes with discussion on the approach to sustainability for selected sectors.

• On personal financial services (PFS), the segment’s internal ESG rating criteria for end-financing of development projects focuses on: i) energy efficiency; ii) water efficiency; iii) environmental quality; iv) innovation/gas initiatives; v) environmental protection; and vi) carbon emission. The bank has its own internal ESG rating for two types of development: i) building; and ii) township for developers and the number of criteria they fulfil in the checklist which will determine if a project is rated low, medium or high risk for ESG. We understand that of 167 end-financing projects approved, the ESG assessment conducted from Jan to May 2021 showed projects that were approved fell within the low to medium risk category.

• HLBB also has taken efforts to reduce carbon emissions at its buildings at PJ City and Hong Leong Tower.

• In Dec 2020, the group has rolled out sustainable procurement policy to ensure fair, sustainable and ethical approach to procure goods and services from vendors/suppliers.

• Overall, the adoption of sustainable practices in onboarding new customers provide stability in its asset quality as well as the potential benefit of lowering funding cost in the near future.

• The group has been invited to participate in the 2021 ESG assessment for the Dow Jones Sustainability Index.

Source: AmInvest Research - 17 Jun 2021