• Still BUY and MYR23.20 TP, 21% upside and c.3% FY24F (Jun) yield. Hong Leong Bank briefed analysts and fund managers yesterday on its Transformative 3-5 Year Plan. This entails a combination of leveraging off its existing strengths, ie solid asset quality and cost efficiency, while pulling key levers in loans, non-II and regional presence to drive incremental growth. Ultimately, the goal is to raise its ROE to 12-12.5% over the next two years (FY23: 11.8%), rising to >12.5% within five years, which HL Bank is confident in achieving in the third year. Overall, we think the targets look reasonable.

• Leveraging off existing strengths while tapping on growth opportunities. The three key areas identified to drive incremental ROE are: i) An acceleration in SME and overseas (mainly Singapore (SG)) loans growth (20% of the ROE enhancement); ii) stronger non-II contribution from franchise sales, wealth and trade as well as other business and corporate banking (BCB) fees. Non-II is expected to be the major ROE growth driver (40-45% of incremental ROE); and iii) higher regional PBT contribution. Note that the above are incremental growth drivers, in addition to its business-asusual activities, eg bread-and-butter mortgages.

• Firing up all engines. In order to achieve its targets, all key business pillars will have a role and need to contribute. The key business pillars and drivers include: i) Personal Financial Services (PFS) – branch transformation away from retail-focused cost centres to value-added sales and service centres across business segments with auto and PFS SME as focused areas for loans; ii) BCB – drive SME and mid-market/corporate loans and cheap deposit growth as well as seeking non-II opportunities; iii) regional wealth management (WM) – grow fee income via bancassurance, unit trust and treasury (eg foreign currency CASA, forex flows). Good opportunity to cross sell into HL Bank’s SME client base, while seeking new sales opportunities in the Ultra High Net Worth and Islamic base; and iv) regional markets, which mainly relates to SG operations and the SME segment.

• Other highlights. While HL Bank will need to make investments in some of these initiatives – eg branch transformation, building WM teams – management reassured investors that the investments will be paced out to keep CIR under control. On loans growth, management guided for SME loans growth to accelerate to c.15% over the next 3-5 years vs 10% in FY23, while overseas loan mix is expected to rise to 12% over this period from 8% in FY23. Overall, the reinvestment of profits should ensure capital sufficiency to support this growth. HL Bank also highlighted that overall loan growth would be 7-8% over the mid-term plan, vs 7% in FY23, ie not a significant bump up. That said, loan yields may be pressured due to the focus on quality customers and loan mix (ie growth in lower yielding SG market), but this would be mitigated by stronger SME NIMs and non-II contribution, plus credit cost should stay contained. Also, HL Bank had earlier announced plans to allow its LDR to rise towards industry levels. Finally, it said its senior level management compensation is fully aligned with these targets.

Source: RHB Securities Research - 6 Dec 2023