• Stay BUY and MYR23.20 TP, 20% upside with c.3% FY24F yield. Hong Leong Bank (HL Bank) is expected to announce its 2QFY24 (Jun) results on 28 Feb. We expect it to book decent operating income growth QoQ, partly offset by normalising loan provisions from the net write-back in 1QFY24. Its share price performance has lagged, we believe, on concerns over its China exposure. In the near term, we expect a brighter China macroeconomic outlook, which should help allay concerns. Beyond that, its mid-term transformative plan attempts to redress the growth mix closer to home.

• Operating income growth could be decent, led by NII. Despite the slowdown in loan growth momentum in the recent 1QFY24 quarter (flat QoQ), which management said was due to corporate repayments and unattractive pricing, we understand from a recent conversation with HL Bank that the 2QFY24 loan growth momentum should be better – led by both retail and non-retail segments, and in line with the positive momentum from the broader system statistics. NIM is also expected to hold up well, despite the impact from deposit competition. HL Bank had started building up its deposits early in anticipation of seasonal competition. Together with better optimisation of its asset-liability mix, these should support management’s optimism on NIM improvement ahead, as conveyed during its previous briefing.

• Market-related non-II could provide a further boost, but harder to predict. On the non-II front, we think fees should do well in 2QFY24, partly thanks to card- and loan-related fees. Meanwhile, bond yield movements indicate a favourable trading quarter for banks, but market-related income tends to be harder to predict. All-in, baring a sharp drop-off in market income, we think HL Bank should see a decent quarter in terms of operating income.

• Credit cost – expect some normalisation. The above, however, would partly be offset by our expectations of credit cost to normalise – vs the MYR51m write-back in 1QFY24 due to recoveries – where the gross provision charge was low due to stable asset quality and a flat loan base, we believe. Assuming loans pick up QoQ, we expect a net charge in 2QFY24 although 1H credit cost is likely to trail the 10bps guided for FY24.

• Dividends. We expect an interim DPS of 21 sen (2QFY23: 21 sen) and project FY24F DPS at 62 sen (FY23 DPS: 59 sen). This is based on a payout ratio of c.31% (FY23: 32%).

• What are we watching out for? Progress on its transformative 3-5-year plan, especially on the non-II front, as this is the major driver to raise ROEs to 12- 12.5% over the next two years (FY23: 11.8%). Updates on Bank of Chengdu’s (BOCD) performance will also be closely watched, although we gather that HL Bank remains comfortable with BOCD’s customer base and book quality.

• Forecasts and TP retained. Our MYR23.20 TP has a 0% ESG premium/discount built in, as HL Bank’s ESG score is in line with the country median.

Source: RHB Research - 20 Feb 2024