Investment Highlights

• We maintain our HOLD call on Hong Leong Bank with an unchanged fair value of RM18.10/share supported by FY19 ROE of 10.2%, pegging the stock to a forward P/BV of 1.5x. We see the stock as fully valued with the prospects of cost savings from digital initiatives, strong asset quality and better earnings from its associate, Bank of Chengdu priced in. No changes to our estimates as we have already factored in the cost savings from the digital initiatives with the group’s CI ratio improving to 43.0% in FY18 and subsequently to 41.0% and 39.5% in FY19 and FY20 respectively. Benefits from digital transformation are likely to a have a greater impact in terms of cost savings over the next 2-3 years.

• Key takeaways from Hong Leong Bank’s briefing are: i) the group will continue to digitalize the bank; ii) it will transform its branches to engage in more financial management advisory services and increase crossselling of financial products; and iii) to leverage its branch footprint to expand its SME business.

• The group continues to focus strongly on digital initiatives to acquire customers, improve customer experience and to lower its cost of serving its clients for banking transactions. As technology is constantly evolving, we believe that there will be a continuous need to invest on technologies to keep up with the competitors’ offerings and increase the stickiness of its customers. Moving forward, the group’s front-end IT infrastructure will shift from proprietary systems which now require payment of licensing fees as well as reduce its dependency on vendors. In the future, it will move towards an open source platform which will be both agile and easy to migrate to cloud services. It also plans to deliver speedier and cheaper IT solutions through its inhouse capabilities instead of relying on vendors.

• Recall, the group’s CI ratio has improved from 45.8% in FY16 to 42.5% in 1HFY18. Meanwhile, the CI ratio for Malaysia operations has declined from 43.7% in FY16 to 40.5% in 1HFY18. Headcount for the group has reduced from 8,899 in FY16 to 8,704 employees in 1HFY18. This is in line with its digital transformation strategy to support more customer transactions digitally rather than manually. This will free up its employees for crossselling of financial products aimed at increasing its income per customer. This will result in the low-value transactions being handled digitally.

Source: AmInvest Research - 6 Apr 2018