Broker: Maybank Investment Bank Berhad
Date of Report: May 29, 2025

Hong Leong Bank’s 3QFY25 Results: Navigating Earnings Pressure and Strategic Growth

Executive Summary: Hong Leong Bank’s Earnings Dip but Resilience Remains

Hong Leong Bank (HL Bank), one of Malaysia’s leading retail banks, reported its 3QFY25 results, revealing a mixed performance that fell below previous expectations. Despite trimming full-year earnings forecasts, the bank remains a compelling investment due to its robust asset quality, strong balance sheet liquidity, and management’s proactive domestic growth strategy.

Key Highlights and Investment Case

• Stock Price (as of report): MYR 19.90
• 12-Month Price Target: MYR 22.80 (previously MYR 24.30)
• Rating: BUY
• Market Capitalisation: MYR 43.1 billion (USD 10.2 billion)
• Issued Shares: 2,168 million
• Major Shareholders: Hong Leong Financial Group (62.1%), Employees Provident Fund (8.5%), Hong Leong Bank Bhd. (3.7%)

3QFY25 Performance: Earnings Below Expectations

HL Bank’s 3QFY25 core net profit reached MYR 1.05 billion, representing a marginal 0.6% YoY increase but an 8.5% QoQ decline. The cumulative 9MFY25 core net profit stood at MYR 3.29 billion, up 4% YoY. However, this outcome was just 70% of the full-year forecast and 72% of consensus estimates. The key drag was lower contributions from Bank of Chengdu (BOCD), coupled with a higher effective tax rate resulting from a reduced stake in BOCD to 17.8% (from 19.8%) after bond conversions.

9MFY25: Growth Amidst Isolated Weaknesses

• Loan Growth: A robust 7.2% YoY increase, with domestic mortgage and auto financing up 5.8% and 10.9% YoY, respectively. Unsecured loans grew 7.3%, while lending to business enterprises and SMEs rose 6.5% and 6.8% YoY. Internationally, Singapore and Vietnam lending soared by 19.1% and 21.8% in local currency terms.
• Non-Interest Income (NOII): Surged 31% YoY, primarily driven by higher trading, investment, and forex income. Wealth management and bancassurance income jumped 37.8% YoY. Sales from global market franchise (forex and hedging solutions) rose 40.3% YoY.
• Positive JAWS: Operating income grew 11.3% YoY against an 8.3% YoY rise in operating expenses, lowering the cost/income ratio to 38.8% (from 39.8% the previous year).
• Credit Cost Environment: Credit costs were benign, with management writing back MYR 399 million of overlays, reducing the balance to MYR 175 million. Excluding this, credit cost would be just 1bp in 9MFY25.

However, negatives included a 3bps QoQ decline in net interest margin (NIM) and significant dilution losses from BOCD, offset only partially by the overlay writebacks.

Detailed Financial Performance Table

Forecast Revisions and Target Price Adjustment

Considering the dilution in BOCD and a higher effective tax rate, the bank’s FY25/26/27E net profit forecasts have been trimmed by 3.4%, 6.1%, and 6.4%, respectively. This led to a revised target price of MYR 22.80 (down from MYR 24.30), based on CY25 PBV of 1.1x (previously 1.2x), COE of 10.2%, and long-term growth of 3.5%.

Quarterly and Cumulative Results Breakdown

Balance Sheet Strength and Liquidity

• Gross Loans & Advances: MYR 201.2 billion (up 7.2% YoY)
• Customer Deposits: MYR 227.3 billion (up 5.9% YoY)
• CASA Ratio: 30.4% (down from 31.3% end-Dec 2024)
• Loan/Deposit Ratio: 87.9%
• Liquidity Coverage Ratio: 133%

Net Interest Margin (NIM) Trends

• NIM for 3QFY25 slipped by 3bps QoQ to 1.87%, averaging 1.90% for 9MFY25.
• Management maintains NIM guidance of 1.85–1.95% for FY25.
• Recent SRR reduction expected to boost NIM by about 2bps.

Cost Management and Asset Quality

• Operating Expenses: Up 8.3% YoY, mainly due to higher marketing and admin costs.
• Cost/Income Ratio: Lowered to 38.8% in 9MFY25 (vs 39.8% in 9MFY24).
• Gross Impaired Loans (GIL) Ratio: 0.57% (Malaysia: 0.55%, Overseas: 0.79%)
• Loan Loss Coverage: Reduced to 95% (from 139% due to overlay writebacks); 165% including regulatory reserves.

Bank of Chengdu (BOCD) Update

• FY24 Pretax Profit: Up 10% YoY
• Loan Growth: 17% YoY
• GIL Ratio: 0.66%
• Loan Loss Coverage: 456%
• Cost/Income Ratio: 24.1%
• ROE: 14.8%

HL Bank’s 17.8% BOCD stake is currently valued at approximately MYR 9 billion, with the initial 2008 acquisition cost of MYR 2.05 billion already recouped via MYR 2.15 billion in dividends. BOCD’s loan exposure to the manufacturing sector is 6–7%, mainly to inland Chinese companies, with minimal exposure to US-linked businesses.

Capital Ratios and Dividend Outlook

• CET1 Ratio: 12.8% (management expects a 50bps accretion from Basel III risk weights adoption)
• Dividend Policy: Final DPS for FY25 is projected at 48 sen, total DPS at 73 sen (payout ratio: 35%)

Key Risks

• Domestic economic slowdown impacting group earnings
• Increased deposit rate competition
• Potential deterioration in China’s economic environment, especially in Sichuan Province, affecting BOCD’s contributions

Foreign Shareholding and Valuation Trends

• Foreign ownership stood at 11.5% as of end-March 2025
• One-year forward rolling PER mean: 11.9x (range: 10.1x to 13.7x)
• One-year forward rolling P/BV mean: 1.4x (range: 1.2x to 1.7x)

Outlook and Conclusion

Despite a softer set of results for 3QFY25, Hong Leong Bank’s consistent loan growth, strong asset quality, effective cost management, and resilient non-interest income ensure it remains well-positioned for future growth. While associate contributions from BOCD have reduced, the overall investment case is supported by a liquid balance sheet, a proactive management team, and prudent risk controls. The bank’s core metrics, including ROE and dividend yield, remain attractive relative to peers, making it a notable contender for investors seeking steady returns in Malaysia’s banking sector.

The revised 12-month price target of MYR 22.80 offers a potential 17% upside from current levels, maintaining a BUY rating for Hong Leong Bank.