UOB Kay Hian
Date of Report: 29 May 2025

Hong Leong Bank Berhad 3QFY25: Robust Earnings, Strong Non-Interest Income, and Attractive Valuation Highlight Growth Prospects

Overview and Investment Recommendation

Hong Leong Bank Berhad (HLBK MK), Malaysia’s fourth largest bank by assets, has delivered a strong set of results for 3QFY25, surpassing market expectations. Driven by provision write-backs, impressive growth in non-interest income (NOII), and positive operating leverage, the bank continues to show resilience and scalability. UOB Kay Hian maintains a BUY rating on the stock, with a revised target price of RM23.80, reflecting a 19.6% upside from the current price of RM19.94.

Stock Snapshot

• Sector: Financials
• Market Cap: RM43.1 billion (US\$10.2 billion)
• Shares Issued: 2,167.7 million
• Major Shareholders: Hong Leong Financial Group Berhad (61.8%), Employees Provident Fund Board (8.4%)
• 52-week High/Low: RM21.90 / RM18.70
• FY25 NAV/Share: RM19.26
• FY25 CAR Tier-1: 14.38%

Key Highlights from 3QFY25 Results

• Core net profit for 3QFY25: RM1.35 billion (up 29.2% YoY, 17.6% QoQ)
• 9MFY25 core earnings: RM3.6 billion, representing 78% of full-year forecast (up 13.5% YoY)
• PPOP (Pre-Provision Operating Profit): Rose 10.3% YoY in 3QFY25, up 13.2% for 9MFY25
• NOII: Surged 34% YoY for 9MFY25; 47.6% YoY increase in 3QFY25
• Net Interest Margin (NIM): 1.87% in 3QFY25, stable YoY and within management guidance
• Loan Growth: 7.2% YoY, above the industry average and above internal targets
• Provision Write-backs: Net write-back of RM398 million in 3QFY25, driven by reversal of management overlays
• Cost/Income Ratio: 38.8% for 9MFY25, reflecting strong cost discipline

Financial Performance Table

Detailed Operational Review

Non-Interest Income and Operating Efficiency

• NOII delivered stellar growth of 34.1% YoY in 9MFY25, with strength seen across:
• Wealth management & bancassurance: +37.8% YoY
• Trading income: +50.2% YoY
• Credit card fees: +6.3% YoY
• Operating expenses rose moderately (4.1% YoY in 3QFY25), mainly due to staff and digital transformation investments.
• Cost/income ratio improved to 38.8% in 9MFY25, underscoring scalable growth and productivity gains.

Loan and Deposit Growth Trends

• 9MFY25 group loan growth of 7.2% YoY, above the 6.0-7.0% target and forecast, though slightly moderating from 1HFY25’s 7.7%.
• Growth led by:
• Auto loans: +10.9%
• Mortgages: +5.8%
• SMEs: +6.8% (down from 11.6% in 1HFY25)
• Deposit growth at 5.7% YoY, with a loan/deposit ratio of 88.1% for 3QFY25.

Net Interest Income and Margins

• 3QFY25 NII grew 0.8% YoY to RM1.19b, with 9MFY25 NII up 5.8% YoY to RM3.66b.
• NIM for 3QFY25 was 1.87%, slightly down 3bp QoQ due to higher funding costs, but in line with the full-year forecast and management’s 1.85-1.95% target.

Credit Costs, Asset Quality, and Provisioning

• Significant net provision write-back of RM398 million in 3QFY25, with a net credit cost write-back of -79bp for the quarter and -25bp for 9MFY25.
• Write-back driven by release of excess management overlays, reflecting robust regulatory reserves and high loan collateralisation. RM175m in provisions were reversed.
• GIL (Gross Impaired Loan) ratio ticked up slightly to 0.57% due to a single, well-collateralized corporate account in Singapore. Excluding the one-off, normalized net credit cost was just 1bp.
• Loan loss coverage ratio dropped to 95% after the provision release, but including regulatory reserves, coverage remains robust at 250%.

Capital, Dividend Outlook, and Guidance

• CET1 ratio at 13.2%. Management expects up to 50bp accretion under Basel 4 through gradual RWA optimization.
• Dividend payout ratio is forecast to rise from 35% in FY24 to 40%, 45%, and 50% in FY25-27, translating to a 4-6% dividend yield.

Bank of Chengdu: Contribution and Outlook

• HLBK’s stake in Bank of Chengdu has been intentionally diluted to 17.8% (from a peak of 19.8%), resulting in a 7.4% YoY drop in earnings contribution for 9MFY25.
• Bank of Chengdu remains resilient, posting a 6% earnings growth in 1Q25 and an impressive loan loss coverage of 456%.

FY25 Guidance and Key Assumptions

• Net credit cost: <10bp
• GIL ratio: <0.65%
• Loan growth: 6-7%
• Cost-to-income ratio: ~41%
• NIM: 1.85-1.95%
• ROE: ~12%

Earnings Revision and Valuation

• FY25 earnings forecast revised upward by 7.5% to reflect provision write-backs.
• FY26-27 earnings estimates trimmed by 2-3% to account for anticipated OPR cuts in 2H25.
• Target price raised to RM23.80 (1.22x FY26F P/B, 11.5% ROE), maintaining alignment with historical mean valuations.
• Current valuation at just 1.0x P/B, approximately -1.5 standard deviations below historical mean, offers an attractive entry point for investors.

Environmental, Social & Governance (ESG) Updates

• Environmental:
  • Targeting 40-50% reduction in Scope 1 and 2 emissions by 2031
  • Hybrid vehicle financing market share increased to 9% in 2021, accounting for 2.8% of total HP loans
• Social:
  • 40% female representation in upper management
• Governance:
  • Independent Non-Executive Directors comprise 55% of the board

Key Financial and Operating Ratios (FY25F–FY27F)

Conclusion: Outlook and Investment Case

Hong Leong Bank Berhad continues to deliver on all fronts, with strong core performance, prudent risk management, cost discipline, and a clear capital return strategy. The bank’s robust non-interest income, prudent credit risk management, and attractive valuation support a positive investment thesis. With an uplift in dividend payout and a compelling entry point relative to historical valuations, HLBK remains one of the most attractive banking stocks for investors looking for growth, stability, and sustainable returns in the Malaysian financial sector.