This article first appeared in The Edge Financial Daily on January 7, 2020

Hong Leong Bank Bhd
(Jan 6, RM17.60)
Maintain buy with a target price (TP) of RM19.55: Hong Leong Bank Bhd (HLB) has maintained resilient earnings despite the ongoing headwinds impacting the sector. Its primarily retail-led loans growth has been encouraging, beating the industry’s in a seasonally weak quarter, helped by a strong franchise in the small and medium enterprise  market. The asset quality continues to be of little issue with a 0.8% gross impaired loan ratio, while net provisions are expected to be benign. Margins have improved as deposit competition loosens and HLB has released some excessive liquidity, which could be optimised if it relaxes its loan-to-deposit ratio (LDR) target of 85% (industry: 89%). The group enjoys substantial support from its associate Bank of Chengdu Co Ltd, which continues to support earnings by contributing more than 15% of HLB’s pre-tax profit.

Its stable earnings performance attests to the bank’s solid fundamentals. We believe there is value to this banking franchise which is well-equipped to survive the challenging operating environment.

The group had recently revised its guidance with a higher LDR target. While we do not expect a big swing in the near term, further loosening of this metric can help it achieve stronger net interest margins (NIMs), earnings and return on equity (ROE).

We maintain “buy” with a TP of RM19.55. Our TP is derived using the Gordon Growth Model, assuming a 10% ROE, an 8% cost of equity and a 4% long-term growth rate.

The slower-than-expected earnings growth, prolonged weakness in NIMs and inability to diversify income sources towards targeted segments, such as wealth management, could dent HLB’s profit growth. — AllianceDBS Research, Jan 6