Date: October 1, 2024
Broker: UOB Kay Hian

Sector Context

In UOB Kay Hian’s October 1, 2024 report, Hong Leong Bank is identified as one of the key laggards in the Malaysian banking sector that could offer potential upside. The overall sector is seeing a deceleration in loan growth, with August 2024 showing a 6.0% year-on-year increase, down from 6.4% in July. The slower loan growth is mainly attributed to weaker business loans, although household loans remained steady.

Focus on Sector Laggards

The broker recommends focusing on sector laggards such as Hong Leong Bank to capture a more favorable risk-reward balance. The bank is trading at 1 Standard Deviation below its historical Price-to-Book (P/B) ratio, which positions it as an attractive investment option. This suggests that the stock is undervalued compared to its historical performance, making it a compelling pick for long-term investors.

Valuation and Recommendation

Hong Leong Bank is given a BUY recommendation by UOB Kay Hian. The stock’s current share price is RM21.56, with a target price of RM23.60. The bank’s attractive valuation below its historical mean P/B ratio is noted as one of the key reasons for the recommendation. Investors may find value in Hong Leong Bank’s potential to benefit from a more favorable market environment.

Benefiting from Credit Cost Tailwinds

Hong Leong Bank is expected to benefit from potential credit cost tailwinds in the near term. This means that the bank could see lower credit costs, improving its profitability. The report highlights that Hong Leong Bank, alongside Public Bank, is poised to take advantage of this favorable trend, which could provide a further boost to its earnings and stock performance.

Asset Quality and Stability

The bank has a strong asset quality framework in place, supported by robust provisions that have been set aside to buffer against potential short-term risks. Like other major Malaysian banks, Hong Leong Bank has built up significant loan-loss provisions over the past few years, which should help mitigate the impact of any global macroeconomic challenges.

Performance Metrics

Hong Leong Bank’s performance metrics are solid, with the bank maintaining stable asset quality and operational strength. The bank’s Return on Equity (ROE) is projected at 11.7%, with a P/B ratio of 1.2x, reflecting its efficient use of capital. Its dividend yield is forecasted at 3.2%, providing investors with a steady income stream while they benefit from potential stock price appreciation.

Conclusion
Hong Leong Bank is an attractive investment opportunity, benefiting from undervaluation relative to its historical performance and the potential for lower credit costs. With its solid asset quality, robust provisions, and favorable market conditions, the bank is well-positioned to deliver returns for investors looking for stable, long-term growth.