This article first appeared in The Edge Financial Daily on September 19, 2019

Hong Leong Bank Bhd
(Sept 18, RM16.50)
Maintain buy with an unchanged target price of RM18.70: Hong Leong Bank Bhd’s management remains confident about its outlook, while acknowledging that challenging times lie ahead.

The bank’s solid asset quality and robust capital position, coupled with a steady dividend profile, make it an attractive defensive play within the sector. As its share price has retracted by 20% year to date, the stock is trading at 1.24 times financial year ending June 30, 2020 (FY20) price-to-book value (P/B) versus its historical mean of 1.5 times.

Management indicated that the mortgage pipeline remains healthy, with the approval rate stable at around 73%, and should be able to sustain FY20’s growth rate at a high single digits.

Apart from this, retail unsecured loans (personal financing and credit cards) are also an area of focus, where Hong Leong Bank is seeing good traction, namely in credit cards.

Small- and medium-sized enterprise (SME) lending continues to be another key growth diver. The bank is looking to further penetrate into its existing SME accounts by tapping into the clients’ supply chain and expanding offerings to address their needs.

Management remains upbeat about the SME segment’s outlook and asset quality, stating that most SME clients are in retail and wholesale segments, which are more domestic-oriented.

In the fourth quarter ended June 30, 2019 (4QFY19), net interest margin (NIM) fell 11 basis points (bps) quarter-on-quarter (q-o-q) to 1.89% on lower overnight policy rate (OPR).

Management is targeting NIM of 2% for FY20 as deposit repricing approaches an end, barring any further OPR cut by Bank Negara (BNM). The bank’s decision to allow the loan-to-deposit ratio to drift closer to 85% (from 82%) is another mitigating factor.

Management also noted that funding cost pressure is subsiding, as most banks have met the net stable funding ratio requirement set by BNM. Its full-year NIM would be clipped by 2bps to 3bps, should another 25bps OPR cut materialise.

Management remains confident about asset quality and sees no systematic risks in the bank’s portfolio. Gross impaired loan ratio stood at a low 0.78% for FY19, and management is expecting it to remain below 1% in FY20. Net credit cost is expected to be 10bps to 12bps for FY20.

We make no changes to our FY20 to FY21 earnings. Hong Leong Bank’s relatively stable return-on-equity trajectory and solid asset quality are preferred, given the slower economic growth. — RHB Research Institute, Sept 18