This article first appeared in The Edge Financial Daily on August 29, 2019

KUALA LUMPUR: Hong Leong Bank Bhd (HLB), which recorded a loan growth of 6.6% in the financial year ended June 30, 2019 (FY19) with its net profit climbing 0.76% year-on-year, is targeting a loan growth of between 5% and 6% in FY20, as it expects the country’s growth to remain robust this year, following a stronger-than-expected second quarter (2Q).

The loan growth target will continue to be driven by small and medium enterprises (SMEs), and mortgages, according to HLB group managing director and chief executive officer Domenic Fuda at a media briefing on the group’s 4Q and full-year FY19 results yesterday.

“I expect a pickup in the corporate lending space this year and the [banking] industry will be back to grow 5%, [from 4.2% to 4.3% last year],” said Fuda, adding that the bank is looking to disburse RM5 billion worth of loans to SMEs this year, and to record slightly over RM12 billion worth of mortgage loans.

Malaysia’s growth will stay solid, said Fuda, on the back of more foreign direct investments and mega infrastructure projects in the pipeline. Likewise, the banking industry’s growth should reflect that, he said.

Other key performance indicators the bank has set for FY20 are a net interest margin or NIM of around 2%, a gross impaired loan ratio or GIL of below 1%, and a return-on-equity (ROE) of around 10.5% to 11%.

In contrast, the bank achieved a NIM of 1.96% in FY19 — below the 2% it had targeted for that year — while the GIL ratio hit a record low of 0.78%, versus the bank’s below -1% target, and the ROE came in at 10.8%, 20 basis points shy of the 11% it had aimed for. The bank announced that its net profit for FY19 came in at RM2.66 billion versus RM2.64 billion a year ago, though net income fell to RM4.73 billion from RM4.84 billion. This came as its 4Q net profit rose 1.67% to RM636.45 million from RM626.01 million, following a rise in the share of associates’ profits, despite net income slipping to RM1.17 billion from RM1.18 billion. HLB proposed a final dividend of 34 sen per share for FY19, subject to shareholders’ approval.

‘50-50 chance of another OPR cut’

Fuda said the bank’s key performance indicators for FY20 were set without taking into account the possibility of any further overnight policy rate cut (OPR).

Having said that, he acknowledged that there had been a lot of talk that another OPR cut is on the horizon after Bank Negara Malaysia (BNM) trimmed it by 25 basis points (bps) to 3% in May. HLB, Fuda said, is of the view that there is a 50-50 chance another cut could materialise as soon as November.

“I believe the OPR cut in Malaysia will be more as a pre-emptive measure to ensure that Malaysia continues to have a reasonable GDP (gross domestic product) growth, rather than a recession,” said Fuda.

He said whether BNM decides on another rate cut depends on what the rest of the world does, in particular if the US Federal Reserve decides to lower its rates.

Should there be another cut, the expected impact on HLB’s NIM is around 2bps to 3bps for FY20, said chief financial officer Malkit Singh Maan, adding that the impact would be similar on the bank’s net profit. He said the bank had been very proactive in taking steps to mitigate the potential risks.

As for deposits, he said, the intense competition is easing as most banks would have already complied with the requirements of the Net Stable Funding Ratio or NSFR.

HLB shares closed 22 sen or 1.34% lower at RM16.26 yesterday, valuing the bank at RM35.25 billion. Year to date, the counter has retreated 19.7% from RM20.25.