PETALING JAYA: Hong Leong Bank (HLB) possess competitive advantages such as dynamic workforce, advanced digital capabilities, ample balance sheet liquidity and capital, and robust Bank of Chengdu (BOCD) contribution that will enhance its growth.
According to Affin Hwang Investment Bank (Affin Hwang IB), HLB continues to stand out in Malaysia’s banking sector with its stellar financial performance.
He said the group delivered the second highest return on equity (first quarter of financial year 2024 or 1Q24: 12.1%) and has survived the pandemic without issues on its asset quality and capital.
“In the next three to five years, we expect to see more positive changes through its strategic transformative plan, to be spearheaded by five key business drivers,” the research house said.
It said the group’s key business drivers are business lines, people, technology, brand and environmental, social and governance.
HLB has set a bank-wide loan growth target of 7% to 8% in the next three to five years.
The primary growth driver will come from beefing up the small and medium enterprise (SME) loan growth towards 15% per annum from 9.7% year-on-year (y-o-y) in FY23 and overseas loan growth at 12% from 7.7% y-o-y in FY23.
The bank aims to further beef up the auto loan book by 1.7 times, considering the burgeoning market for green car-financing.
HLB has also set a five-year target in return on equity of more than 12.5% in three years, by accelerating loans growth, stepping up non-interest income, current account-savings account acquisition and expanding its regional revenue contribution.
“Ultimately, management aims to reshape its current loan portfolio mix (62:28) from being heavy on the personal financial services versus business to a more optimal 50:50 ratio.
“This will be done by tapping more into the country’s growth segment, the SMEs, and to beef up contributions from Singapore through expansion of the loan book and in wealth management,” Affin-Hwang IB said.
The key roles of each business unit are primarily to focus on transformation out-of-the-norm, expansion of clientele services and creation of more value, building capabilities and capturing/identifying new opportunities, commercialising the digital capabilities especially artificial intelligence (AI), and refreshing the HLB brand.
The abundant opportunities for financing will be driven by the acceleration of infrastructure spending, advancing the energy transition plan and decarbonisation of the economy, and re-industrialisation and data-centre expansion.
Affin Hwang IB pointed out that SME and mid-sized corporate segments would play an instrumental role to provide supporting services and hence will require ample funding and working capital for their business expansion.
“Based on management’s guidance, HLB’s digital capability, advanced with AI, plays an important role in the transformation of the core banking business through hyper-personalisation enabling customers to meet their personal needs, providing customer care and support, hyper-automation (streamlining and marrying processes) as well as cloud-optimisation.
“Overall, HLB is able to take on a higher degree of online transactions, with a capacity increase of more than three times, and can provide enhanced security and stability,” the research house added.
It reiterated its “buy” call on HLB with an unchanged 12-month target price of RM24 (based on a Gordon Growth derived price-to-book value multiple of 1.27 times).
Affin Hwang IB said HLB’s downside risks are cushioned by sound asset quality with gross impaired loan ratio at 0.57%, sufficient loan loss reserves (165% versus peer average at 99%) and common equity tier-one ratio of 12.6%, making it one of the most defensive among peers.
It added that HLB has the benefit of a significant chunk of bottom-line contribution from its 19.8%-associate BOCD, which accounts for roughly 28% of HLB’s pre-tax profit.
BOCD’s contribution is projected to grow at a rate of 20% to 30% per annum.
