Hong Leong Bank (HLB), dated August 29, 2024. The report reviews HLB’s financial performance for FY24 and provides an outlook and investment recommendation. Here’s a detailed summary with elaborations:
Financial Performance Overview (FY24)
- Revenue and Profit Growth:
- Core Net Profit: HLB reported a core net profit of MYR 4.2 billion for FY24, reflecting a 9% year-on-year (YoY) increase. The 4QFY24 core net profit was MYR 1.03 billion, a 14% YoY increase, though it showed a slight decline of 1% quarter-on-quarter (QoQ).
- Operating Income: The bank’s operating income grew by 1.5% YoY to MYR 5.77 billion, despite a contraction in non-interest income (NOII), which declined by 7% YoY. The net interest margin (NIM) was slightly compressed by 12 basis points YoY, ending the year at 1.86%.
- Loan Growth: Loan growth was robust at 7.3% YoY, driven by strong demand in both domestic and international markets. Domestic mortgages and auto financing grew by 6.3% and 12.1% YoY, respectively. Loans to domestic business enterprises and SMEs increased by 8.7% and 13.6% YoY, respectively.
- Expenses and Cost Management:
- Operating Expenses: HLB managed its operating expenses effectively, which rose by 4.7% YoY. The cost-to-income ratio increased slightly to 40.5%, up from 39.3% in FY23, due to higher staff and other operating costs.
- Credit Cost: The bank benefited from net write-backs in provisions, leading to a net credit write-back of -6 basis points for FY24, compared to a charge of 7 basis points in FY23.
- Dividends:
- HLB declared a final dividend per share (DPS) of 43 sen, up from 38 sen in the previous year. This brings the total DPS for FY24 to 68 sen, representing a payout ratio of 33%. The management aims to gradually increase the payout ratio to 40% over time.
Management’s Outlook and Projections for FY25
- Loan Growth: HLB targets a loan growth rate of 6-7% for FY25, slightly lower than the 7.3% achieved in FY24. This is in line with the bank’s cautious outlook on the domestic and international economic environment.
- Net Interest Margin (NIM): The bank expects NIM to range between 1.85-1.95% in FY25, closely aligned with the FY24 average of 1.86%.
- Cost-to-Income Ratio (CIR): The CIR target is set at 41% for FY25, slightly higher than FY24’s 40.5%.
- Return on Equity (ROE): Management is targeting an ROE of 12% for FY25, marginally higher than the 11.8% achieved in FY24.
Investment Recommendation
- Rating: The report maintains a “BUY” rating for HLB, with a target price upgraded to MYR 24.30 from MYR 23.00. This reflects the bank’s solid financial performance, robust loan growth, and strategic management of costs and credit risks.
- Valuation: The valuation is based on a price-to-book value (PBV) multiple of 1.2x, slightly lower than the previous target of 1.3x, but still attractive given HLB’s consistent earnings growth and strong balance sheet.
Risks and Considerations
- Economic Slowdown: A potential slowdown in the domestic economy could negatively impact loan growth and overall profitability.
- Regulatory Risks: Increased competition in deposit rates and any adverse regulatory changes, especially in China’s Sichuan Province where HLB has exposure through Bank of Chengdu, could pose risks to earnings.
- Asset Quality: While asset quality remained stable, with a gross impaired loans (GIL) ratio of 0.57%, any deterioration in asset quality could lead to higher credit costs.
Conclusion
HLB has delivered solid financial performance in FY24, driven by strong loan growth and effective cost management. The bank is well-positioned for continued growth in FY25, with a focus on maintaining profitability and improving shareholder returns through higher dividends. The “BUY” recommendation is supported by the bank’s robust fundamentals and attractive valuation metrics.
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