Hong Leong Bank Berhad - Initiation
Wed, 04-Dec-2024 09:42 am
by Samuel Woo • Apex Research

Counter

HLBANK (5819)

Target Price (RM)

24.79

Recommendation

Buy

Investment Highlights

 

  • Industry-leading ROE. HLBK’s 11-12% ROE is among the top in within the industry. There are three main factors: (i) Excellent cost control, (ii) Low provisioning charges due to excellent asset quality, and (iii) Strong contributions from BOCD.

 

  • Moving forward, the Group is optimising several central components of its income statement to maintain its high level of profitability. These include (i) Reshaping its loan portfolio to include a larger component of higher-yielding business loans, which should improve loan yields, (ii) Increasing its CASA balances and other forms of liability management as a form of COF optimisation, (iii) Improving NOII contributions by building up client-based income-contributing services, such as wealth management and Global Markets business. 

 

  • This is a good move, given that ROE sees a couple of possible downsides: (i) The coming pare-down of BOCD shareholdings (which should in turn reduce BOCD contributions) and (ii) Increased spending to remain competitive.

 

  • Defensive pick, given high asset quality and low NCC. HLBK’s GIL ratio of 0.53% is currently the lowest in the industry. As a result, its NCC is also very low, often reaching <10bps. FY24, given a slew of solid recoveries, saw a net writeback of 6bps NCC. Its LLC of 155% is also among the highest in the industry, implying that there is room for a few more writeback instances.

 

  • Note that base GIL ratio may creep up as the Group increases the proportion of business loans making up its total loanbook. This is not expected to affect the GIL ratio or NCC significantly – we doubt GIL ratio will reach anywhere close to the 1.0% mark.

 

  • Solid Bank of Chengdu contributions. BOCD contributions make up roughly a third of PBT. The bank continues to boast exceptional growth and performance above the industry average. Despite this, the Group intends to reduce reliance on BOCD’s contributions, as Associate performance increasingly affects quarterly results. HLBK has a c.19.6% stake in the company. This stake is expected to reduce to 17.8% within a year.

     

  • Rising regional contribution. Management is working on its pre-BOCD contributions via a stronger regional presence to compensate for reduced Associate contributions. Standouts are the Singaporean and Vietnam geographical segments, which see excellent loan and deposit growth. In particular, Singapore is a solid driver in developing its fee-income-related franchise. Pre-BOCD contributions translate to roughly 10% of ROE, which is still slightly lower than HLBK’s standard 11-12% range. 

     

    Valuation & Recommendation

  • We initiate coverage on HLBK with a BUY recommendation and a target price of RM24.79 based on an FY26F PBV of 1.17x GGM-PBV valuation. (GGM Assumptions: FY26F ROE of 11.6%, LTG of 4.0%, & COE of 10.5%.).

     

  • We favour HLBK for its (i) Industry-leading ROE, (ii) Excellent asset quality, and low provisioning, (iii) Solid BOCD contributions, and (iv) Rising regional contributions. 

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