Investment Highlights

• We maintain BUY on Hong Leong Bank (HLBB) with an unchanged fair value of RM24.10/share, pegging the stock to FY25F ROE of 11.1%, leading to a P/BV of 1.2x with a 3% premium accorded for a 4-star ESG rating.

• Marginal revision to our FY24F/25F/26F earnings by 1.7%/2.4%/1% after fine-tuning our projection on the share of profit from associates.

• Sequentially over the last 3 quarters (1QFY24 to 3QFY24), the group has reported slight QoQ improvements in NIM. This was attributed to loan expansion and asset/liability management. For 4QFY24, NIM is likely to continue to rise moderately QoQ, contributed by improvements in asset yield and funding cost. We see HLBB to be on track to meet its guided NIM of 1.8%-1.9% for FY24F.

• Mortgage loan yield continued to be seen pressured by competitive rates offered by peers. Nevertheless, this has been offset by growth in other higher yielding loans (credit cards, personal and SME financing).

• Auto loans have been gaining traction, supported by partnerships with car dealers. Overall loan growth in 4QFY24 is likely to come in at 7% YoY, the higher end of the group’s guided range of 6%-7% for FY24.

• Deposit competition persists but was not as intense as in early-2023 and 4Q22. FD rates have been more rational than before with the group now offering 3.6%-3.65% for tenures of between 6 months to 12 months, lower than 3.7% in late- 2023. These promotional rates are until 31 July 2024, subject to a maximum placement of RM200,000. We see room for further downward repricing in FD rates to be limited in the near term. This is due to the attractive deposit rates offered by digital banks and the FD rates of close to 4% by smaller-capitalised Islamic banks for tenures of 9-12 months.

• HLBB has unlimited instant cashback promotion on their e- wallet targeted at the younger generation from 8 July to 7 Sept 2024. This is to compete with the offerings of digital banks. After the promotion period, cashbacks on e-wallet will be capped at RM10/month up to RM120/year.

• On NOII, trading and investment income continues to be challenging in view of macro uncertainties impacting the yield curve. Average duration of securities portfolio was less than 5 years. In contrast, franchise sales for FX income have been trending up due to the higher hedging requirements of clients.

• HLBB is focused on expanding its wealth management business regionally. It is restrategising the wealth business across Malaysia and Singapore with additional hirings to expand sales force and the availability of a more complete range of products. Besides, the bank is focussed on growing trade financing and transaction banking business to raise fees and commission income. Investments in technology will be ongoing to enhance transaction banking capabilities.

• HLBB’s net credit cost (NCC) is tracking expectations of not exceeding 10bps for FY24F. Overall GIL ratio in 4QFY24 is likely to come in below 0.7%. A mild uptick in delinquency (30-day past due) is likely on domestic loans in 4QFY24 due to impact of festivities. Meanwhile, overall asset quality of overseas loas is likely to remain stable in 4QFY24. GIL ratios on Singapore and Vietnam’s loans are expected to be sustained. Meanwhile, slight upticks are expected for loans in Cambodia. On a comforting note, Cambodia loans contribute to a meagre 1.2% of the group’s total gross financing as at end-3QFY24. Impaired loans in Cambodia are both well-collateralised and provided for against any potential credit losses.

• The group continues to maintain a pre-emptive provision buffer of RM574mil to mitigate against any risk of credit losses from macroeconomic headwinds.

• There continues to be a lack of visibility on the extent of tapering in profit contribution to group earnings ahead from its 19.8%-owned associate, Bank of Chengdu (BOC). Hence, it remains to be seen whether the pace in the potential uplift in earnings from the expansion of wealth management and transaction banking businesses could mitigate the lower profit contribution of BOC. We have already factored into our earnings estimates the expected moderation in profit from BOC ahead. Despite news flow on the continued slow recovery of the troubled property sector in China, we are comforted that BOC has remained well managed with no exposures to distressed property developers. The associate has a prudent loan loss coverage ratio of 504% and low GIL ratio of 0.66% as at the end of 1QCY24.

• Foreign shareholdings of HLBB declined marginally to 10% as of end-June 2024 vs. 10.25% in Mar 2024.

• HLBB is scheduled to release its 4QFY24 results on 29 Aug 2024. We expect lower earnings of RM994mil (- 4.8%QoQ) in 4QFY23 on the back of a moderate pace in profit contribution from associates (BOC) and slight increase in NCC which will offset a modest improvement in NIM. This is likely to bring the full 12MFY24 net profit to RM4.16bil (+8.8% YoY), supported by modest topline growth, lower provisions and higher share from associates.

• The stock continues to trade at a compelling P/BV of 1.0x, below its 5-year historical average of 1.4x with a dividend yield of 3.5% for FY25F.

Source: AmInvest Research - 25 Jul 2024