Comprehensive Analysis of Hong Leong Bank Berhad

Prepared by UOB Kay Hian – 29 November 2024

Introduction

The 29th of November 2024 marks an insightful presentation by UOB Kay Hian, dissecting the financial performance and strategic outlook of Hong Leong Bank Berhad. This comprehensive evaluation sheds light on the bank’s impressive trajectory and future expectations, weaving through the intricacies of its operations and market dynamics.

Company Overview

Hong Leong Bank Berhad, the fourth-largest bank in terms of asset size, is a prominent player in the retail banking sector. With a significant presence in China through its 20% ownership of Bank of Chengdu, Hong Leong Bank stands as a formidable entity in the financial landscape. The company is listed on the Bloomberg ticker as HLBK MK, with a current share price of RM20.56 and a market capitalization of RM44,568.3 million.

Financial Performance Highlights

The first quarter of FY2025 saw Hong Leong Bank delivering robust financial results, driven by a solid Net Interest Margin (NIM) performance, positive Jaws, strong loan growth, and impressive forex income. The bank’s pre-provision operating profit surged by 16% year-on-year, marking a milestone of six consecutive quarters of NIM improvement.

Quarterly Earnings in Focus

In 1QFY25, Hong Leong Bank reported earnings of RM1,089.9 million, reflecting a 5.8% year-on-year increase. This growth was propelled by an 8 basis point expansion in NIM and a 24% rise in non-interest income, largely attributed to a 166% increase in forex income. Despite a normalization in provisions, the bank maintained a net credit cost of 2 basis points, supported by a 7% loan growth and positive operating Jaws.

Sequential Growth and Strategic Insights

Quarter-on-quarter, the bank’s earnings grew by 5.4%, underpinned by an 8ppt improvement in operating Jaws and a 3bp expansion in NIM. The quarter also witnessed a 27% rise in non-interest income, although provisions reversed, leading to a net credit cost charge of 2bp.

Strategic Growth and Market Position

Hong Leong Bank continues to excel in loan growth, reporting a 6.9% year-on-year increase, aligning with its 6-7% target. This growth was spearheaded by sectors such as SME, mortgages, and auto loans. Management remains optimistic about sustaining this growth trajectory, backed by a robust approval pipeline.

Guidance and Strategic Outlook

Looking ahead to FY2025, the bank’s management offers a positive outlook with key guidances: maintaining a net credit cost of less than 10bp, a GIL ratio of less than 0.65%, a loan growth target of 6-7%, a cost-to-income ratio around 41%, and a NIM range of 1.85-1.95%. The bank also aims for a Return on Equity (ROE) of approximately 12%.

Valuation and Recommendations

UOB Kay Hian maintains a “BUY” recommendation for Hong Leong Bank with a target price of RM23.60. The bank’s strong NIM trajectory, above-industry loan growth, and substantial provision buffers position it as an attractive, high-quality option in the financial sector. The current valuation of 1.10x PBV, trading at -1SD to its historical mean, further enhances its investment appeal.

Environmental, Social, and Governance (ESG) Initiatives

Hong Leong Bank is committed to reducing carbon emissions by 40-50% by 2031 and has increased its market share for hybrid vehicle financing to 9% as of 2021. On the social front, the bank boasts 40% female representation in upper management. Governance practices include a composition of 55% independent non-executive directors on its board.

Conclusion

Hong Leong Bank Berhad continues to demonstrate strong financial health and strategic acumen, making it a compelling choice for investors. With its comprehensive growth strategies, robust financial performance, and commitment to sustainability, the bank is well-positioned to thrive in the competitive banking sector.