Investment Highlights

• We maintain BUY on Hong Leong Bank (HLBB) with unchanged fair value of RM22.60/share based on FY24F ROE of 11.2%, leading to a P/BV of 1.2x. No change to our 4-star ESG rating, which we have accorded a 3% premium to the valuation.

• We tweaked our FY26F earnings slightly by 1.2% to reflect a higher non-interest income (NOII) estimate.

• We attended HLBB’s investor day yesterday which provided details on the group’s transformation plan for the next 3-5 years.

• The group aspires to be the top-3 in terms of the bestmanaged bank domestically in the next 3-5 years.

• HLBB targets a ROE of 12-12.5% within the next 2 years (FY24-FY25) from 11.8% in FY23 and thereafter ROE > 12.5% from FY26 onwards. Aside from ROE, it is aiming for a CI ratio of 40%, credit cost of 10bps, CASA mix of 35% and non-interest income (NOII) to total income ratio of >25% (Exhibit: 1).

• Management alluded to opportunities to uplift the group’s ROE in the next 3-5 years from (Exhibit 2):
  i. Accelerating loan growth in targeted portfolios. This includes expansion in SME and overseas loans;
  ii. Increase in contribution from capital light businesses such as forex, hedging solutions, wealth management, trade -related fees and other fee income under its business & corporate banking (BCB) segment. We understand that NOII will contribute 45-50% of the incremental uplift in ROE targeted and
  iii. Higher PBT contribution from regional operations (mainly Singapore) from 2.2% in FY23 to 7% by FY28.

• As of end FY23, HLBB’s loans comprised of 62% retail, 17% SME, 13% business and corporate banking and 8% international loans (largely Singapore, followed by Cambodia and Vietnam). Management alluded to a potential shift in loan mix by FY2028 (Year 5) towards 50:50 retail/business loans. This will be through a gradual lowering of the share in retail loans and a higher mix of SME and overseas loans (Exhibit 4). The initiative will see the group leaning towards higher quality borrowers for business loans, hence a sacrifice on NIM as lending rates are likely to be more competitive.

Source: AmInvest Research - 6 Dec 2023