• HLB aims to raise its ROE from 11.8% in FY6/23 to 12.0-12.5% in FY24-25F and above 12.5% in FY26F.

• If HLB hits its ROE targets, its FY24-26F net profit would be 7-13% higher than our forecasts, translating into an FY23-26F net profit CAGR of 10.8%.

• Reaffirm Add on HLB, given its attractive CY24F P/E of 10x (vs. 5-year average of 12.2x), despite having one of the best fundamentals in the sector.

Key Takeaways for HLB Session in RFC

Hong Leong Bank (HLB) was represented by its CFO Mr. Malkit Singh Maan during its session on 7 Dec 2023 at our Regional Financial Conference (RFC). The key highlights were HLB’s aspirations in the next 3-5 years, which include: 1) ROE of more than 12.5%, 2) cost-to-income ratio of c.40%, 3) credit charge-off rate of c.10bp, 4) current account savings account (CASA or low-cost deposit) ratio of c.35%, and 5) non-interest income ratio of more than 25%.

HLB Targets ROE Expansion in FY24-26F

HLB aims to raise its ROE from 11.8% in FY6/23 to 12.0-12.5% in FY24-25F and above 12.5% in FY26F. The factors for ROE expansion are its push for growth in SME and overseas loans, non-interest income and overseas profit contributions. We think that HLB has a reasonable chance of achieving its ROE targets due to the management’s commitment to driving ROE and the good qualities of its management, reflected by HLB’s superior financial indicators (such as ROE, credit charge-off rate etc.) vs. most of its peers.

What If HLB Manages to Achieve Its ROE Targets?

Based on our simulation, HLB would have to record a net profit of RM4.25bn in FY24F, RM4.7bn in FY25F and RM5.2bn in FY26F to achieve its FY24-26F ROE targets. These net profits are 7-13% higher than our current projections for FY24-26F and would translate into a much stronger 3-year net profit CAGR of 10.8% in FY23-26F (compared to a 3-year CAGR of 6.3%, based on our forecasts).

Quality Banking Stock Trading at Attractive Valuation; Reaffirm Add

Despite commanding one of the best fundamentals in the sector (in terms of ROE, credit cost, asset quality, etc), HLB is trading at an attractive CY24F P/E of only 10x, 1 s.d. below its 5-year historical average of 12.2x. As such, we reaffirm our Add call on HLB. HLB also replaces RHB Bank as our top pick among Malaysian banks given its much lower credit costs (3-year average credit charge-off rate of 17bp for HLB vs. 32bp for RHB Bank from 4QCY20 to 3QCY23). Potential re-rating catalysts include above-industry loan growth and robust expansion in associate contribution from Bank of Chengdu. Potential downside risks are a material deterioration in loan growth and asset quality. We keep our FY24-26F EPS forecasts and DDM-based TP of RM26.30 (cost of equity of 9.5%; terminal growth rate of 4%).

Source: CGS-CIMB Research - 8 Dec 2023