UOB Kay Hian
Date of Report: 14 July 2025

Hong Leong Bank Berhad: Sustaining Strong Growth Trajectory with Robust Asset Quality and Attractive Valuations

Overview of Hong Leong Bank Berhad

Hong Leong Bank Berhad (HLBank) stands as Malaysia’s fourth-largest bank by asset size, with a strong focus on retail banking and a strategic presence in China via a 20% stake in Bank of Chengdu. Despite recent market volatility, HLBank continues to deliver resilient performance, underpinned by prudent management, innovative digital initiatives, and a healthy balance sheet.

Stock Data and Performance Snapshot

• Share Price: RM19.18
• Target Price: RM23.80 (Upside: +24.1%)
• Market Cap (RMm): 41,576.8
• Major Shareholders: Hong Leong Financial Group Berhad (61.8%), Employees Provident Fund Board (8.9%)
• 52-week High/Low: RM21.88/RM18.42
• 3-Month Avg Daily Turnover (US\$m): 3.6

Investment Highlights

• Management remains confident in sustaining a strong growth trajectory, driven by improved operating Jaws and robust buffers — including a sector-leading regulatory reserve buffer of 250%.
• Asset quality is among the best in class, with minimal provision requirements and stable delinquency rates across retail and business portfolios.
• Maintain BUY rating with a target price of RM23.80, based on 1.22x FY26F P/BV and 11.5% ROE.

Net Interest Margin (NIM) and Rate Outlook

• NIM Recovery Expected: Management guides group NIM to the upper end of 1.85–1.95% for FY25, with a sequential recovery in 4QFY25. This is supported by easing deposit competition, robust domestic CASA growth (7% vs sector’s 3.0%), and the positive impact of Bank Negara Malaysia’s statutory reserve requirement (SRR) cut.
• Impact of OPR Cuts: Each 25bp Overnight Policy Rate (OPR) cut is estimated to reduce NIM by 2bp, while a 1ppt SRR cut adds about 2bp. With two OPR cuts assumed in forecasts, the net full-year NIM impact is a manageable 2bp reduction, translating to an estimated 2% decline in earnings.
• Strategic Mitigations: HLBank is shortening its fixed deposit (FD) mix to attract new deposits with higher rates for shorter tenures (mainly 3 months at 3.70%). The bank also launched a revamped cash management app to boost CASA growth and raised RM400m in sukuk at 3.80% to reduce reliance on costly wholesale deposits. The bank’s loans-to-deposit ratio (currently 89.7%) can be optimized closer to the peer average (93%) if competition persists.

Asset Quality and Provision Buffers

• Stable Asset Quality: The group’s gross impaired loan (GIL) ratio held steady at 0.57%, with only a minor uptick from a single, well-collateralized Singapore exposure.
• Provision Buffers: After writing back RM399m in management overlays, the loan loss coverage (LLC) dropped to 95% from 139%. Including regulatory reserves, LLC remains robust at 250%, or 165% when including collateral values. Management overlay balance now stands at RM175m.
• Low Credit Costs: Excluding the large 3QFY25 write-back, net credit cost is just 1bp, with expectations for FY26 around 2bp.

Loan Growth and Sector Exposure

• Loan Growth Targets: HLBank is on track to hit the upper end of its 6–7% FY25 loan growth target, with 9MFY25 loans up 7.2%. Consumer loans (mortgages and auto) remained stable at ~7%, SME lending at 7–8%, while commercial loans saw a slight slowdown amid tariff uncertainties.
• Limited Tariff Impact: Export-oriented loans constitute only 2–3% of total group loans, so direct tariff impact remains minimal.

Non-Interest Income and Digital Initiatives

• Robust Non-Interest Income: Up 23% in 9MFY25, non-interest income is buoyed by strong forex hedging, trading income, and lower bond yields. Wealth management, bancassurance, and forex hedging — growing at an average 38% — make up around half of the group’s non-interest income. The non-interest income ratio stands at 23%, with a target of 25% over the next three years.
• Digital Banking and CASA Growth: The bank’s digital initiatives, including the revamped cash management app, are expected to further accelerate CASA growth and non-interest income.

Capital and Dividend Outlook

• Capital Strength: CET1 ratio stands at 13.2%, with potential accretion of 50bp under a fully loaded Basel 4 framework as the bank gradually optimizes risk-weighted assets (RWA).
• Dividend Payout: Forecasts indicate a rise in dividend payout ratio from 35% in FY24 to 45–50% over FY25–FY27, translating to a 4–6% yield.

Bank of Chengdu Performance

• Moderating Contribution: The contribution from Bank of Chengdu (stake now at 17.8%, down from 19.8%) declined 7.4% YoY in 9MFY25, impacted by a stronger ringgit and stake dilution.
• Resilient Fundamentals: Despite moderation, Bank of Chengdu delivered 6% earnings growth in 1Q25 and maintains a robust loan loss coverage of 456%. Real estate exposure is well contained at just 5% of total loans. Chengdu’s population and GDP growth continue to outpace the national average, supporting future momentum.
• Share Price Outperformance: Bank of Chengdu’s share price has appreciated 112% over five years and 20% year-to-date, trading at 1.0x PBV, well above the CSI Bank Index’s 29% gain.

Key Financial Guidance and Assumptions for FY25

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

Financial Summary Table

Key Ratios & Operating Metrics

• Tier-1 CAR: 14.4% (2025F), rising to 15.2% (2027F)
• NPL ratio: 0.5% across forecast period
• Loan growth: 6.6% (2025F), 6.2% (2026F), 6.4% (2027F)
• Net profit growth: 19.7% (2025F), -0.1% (2026F), 8.0% (2027F)
• Dividend payout ratio: 40% (2025F), rising to 50% (2027F)

Valuations and Recommendation

• Maintain BUY recommendation with a target price of RM23.80, reflecting 11.5% ROE and 1.22x FY26F P/B.
• Current valuation at 0.98x P/B is approximately -1.5SD below historical mean, making the stock attractive for investors seeking both growth and quality.

Environmental, Social, and Governance (ESG) Updates

• Environmental: Targeting 40–50% reduction in Scope 1 and 2 carbon emissions by 2031. Market share for hybrid vehicle financing reached 9% in 2021, representing 2.8% of total HP loans.
• Social: Women now comprise 40% of upper management.
• Governance: 55% of the board are Independent Non-Executive Directors.

Conclusion

Hong Leong Bank Berhad continues to deliver industry-leading growth, maintain resilient asset quality, and provide attractive shareholder returns. With robust capital buffers, prudent risk management, and a clear digital strategy, HLBank remains well-positioned for sustainable expansion in the Malaysian banking sector and beyond.