Photo by Patrick Goh/The Edge

KUALA LUMPUR (Sept 11): Analysts believe Hong Leong Bank Bhd's (KL:HLBANK) 19.76%-owned listed associate Bank of Chengdu's asset quality should remain resilient, due to excellent precautionary and strict measures taken.

"We now have a much better understanding of Bank of Chengdu’s conservative risk culture and proactive stance," CIMB said in a note on Wednesday.

The house said Bank of Chengdu would usually perform a deep dive assessment of the location, developer reputation, project viability and management integrity before agreeing to finance any particular property project.

"The early warning signals that are closely monitored are: i) construction progress of a property project; ii) sales progress of the project; iii) any budget overruns by the developer; and iv) any usage of the developer’s internal funds for other purposes," the house added.

CIMB said with these precautionary early detections and precautionary strict measures taken in the past, Bank of Chengdu had been able to successfully reduce its exposure to problematic property loans a few years ago, before the macro property slowdown started in China.

Bank of Chengdu had also been able to successfully exit risky loans before the major property slowdown, due to its requirement for borrowers to top up collaterals and guarantees, according to the note.

CIMB maintained Hong Leong Bank as its top sector pick, given that the bank's share price has been a laggard, while lingering concerns over the associate bank in Chengdu are expected to dissipate over time.

“Hong Leong Bank remains confident there should be no major asset quality issues for Bank of Chengdu, and we agree,” CIMB noted.

CIMB maintained its 'buy' call on Hong Leong Bank, with a target price (TP) of RM25.30.

Meanwhile, RHB observed that economic conditions in the city appeared to be healthy.

Bank of Chengdu has a prudent screening policy to protect its asset quality, according to RHB.

For customers in the property development business, this involves scrutinising items such as the project location, project feasibility and progress, tracking the utilisation of funds, and tracking project sales.

The early and thorough screening has reportedly helped Bank of Chengdu to retain its strong asset quality credentials.

Moreover, RHB noted that retail consumption in Chengdu was up 10% year-on-year in 2023, versus the entire China’s 7% growth during the same period, due to the higher income nature of consumers in the city.

Property sales, especially of the higher-end range, have been decent, according to RHB.

The Xi Pai Lan An development (with property prices over seven digits) located near the city’s new financial district was reportedly fully sold, and some units were already occupied, RHB said.

The city’s long-term plan is to become an economy powered by strong renewable energy (RE) and high-tech sectors. Currently, the city is home to around 20 electric vehicle (EV) manufacturers, as well as the largest producer of solar cells in the world.

Given its position as the city’s commercial bank, RHB believes that Bank of Chengdu is poised for further strong growth alongside its clients.

The bank sees its growth driven by the high-tech sector, manufacturing and RE, whereas it is cognisant of potential oversupply in the EV scene.

RHB noted that while retail loan growth is moderating, deposit growth within that segment is still good.

“With or without its associate, we think Hong Leong Bank, a sector top pick, is fundamentally robust and a key laggard play,” RHB said.

RHB maintained its 'buy' call on Hong Leong Bank, with a TP of RM26.60.

At the time of writing on Wednesday, Hong Leong Bank shares were up 28 sen or 1.3% at RM21.58, giving the bank a market capitalisation of RM46.8 billion.