• Keep BUY and MYR26.60 TP, 29% upside and c.4% FY25F (Jun) yield. Hong Leong Bank’s (HLB) 1QFY25 results were in line with expectations, with pre- associates profits growth outpacing that of Bank of Chengdu (BOCD) contributions – as is management’s strategic aim. Hong Leong Bank remains our preferred defensive pick for its stable earnings and resilient asset quality, while valuations are also undemanding.

• Results review. HLB’s 1QFY25 net profit of MYR1.09bn (+6% YoY, +5% QoQ) was in line, forming 25% and 24% of our and Street’s full-year estimates. YoY growth was driven by both NII (+10%) and non-II (+32%), with opex up by a softer 12%. PIOP was up 16%, but was met with impairment allowances of MYR7m (vs net write-back of MYR51m in 1QFY24). Similar trends were observed on a QoQ basis, with NII (+3%), non-II (+31%) and opex (flat) bringing PIOP up 15%. Pre-associates PBT was up 9% YoY (QoQ: +10%), and BOCD contributions added a further MYR375m (+6% YoY, -7% QoQ) to the bottomline. 1QFY25 ROE of 11.8% (1QFY24: 12.1%, 4QFY24: 11.2%) was largely in line with the guidance of c.12% for FY25F.

• Non-II was a key driver of 1QFY25 profits, up 32% YoY to MYR354m. While the bulk of the gains came from the more volatile treasury and markets income, franchise sales of MYR105m was a 60% YoY increase, which adds to the sustainability of the non-II base, in our view. Wealth management income – another of management’s areas of focus – was up 32% YoY.

• Loans growth continued its strong momentum, adding 7% YoY (QoQ: flat) – key drivers were residential mortgages (+6% YoY, +1% QoQ), hire purchase loans (+12% YoY, +1% QoQ), and SMEs (+11% YoY, -1% QoQ). Regionally, YoY growth in Singapore and Vietnam was also strong at 10% and 15% on a local currency basis. Deposits growth was slightly more muted at 5% YoY (QoQ: flat), but encouragingly, CASA growth was a robust 14% YoY (QoQ: - 2%). While it sees some NIM pressure arising from the year-end deposit competition, management thinks it should still end the financial year within the guided range of 1.85-1.95% (1QFY25: 1.92%).

• Other highlights. Asset quality was stable during the quarter with the GIL ratio at 0.54% (4QFY24: 0.53%, 1QFY24: 0.57%). Credit costs of 2bps in 1QFY24 broke the trend of net write-backs throughout FY24, but remains well below management’s guidance of <10bps. With CET-1 ratio now above 13%, HLB aims to gradually raise its dividend payout ratios to levels that are more in line vs its peers (ie 5-6% yield). Elsewhere, HLB hopes to bring BOCD contributions to group PBT down to c.25% (1QFY25: 28%) via a natural dilution of its stake (to 17.8%; currently at 19.2%).

Forecasts adjusted minimally, while our TP is maintained at MYR26.60, inclusive of a 2% ESG premium.

Source: RHB Securities Research - 29 Nov 2024