Commendable 1QFY25 earnings with stronger operating income growth and resilient asset quality. Hong Leong Bank is trading at an attractive FY26F P/BV of 0.9x with room for improvement in valuation to reflect its ROE of 10.9% which is higher than the sector average of 9.7%. This bank has a high LLC of 265.1% including regulatory reserves, with potential uplift in fee income seen from a regional expansion of wealth management business and a decent profit contribution from Bank of Chengdu, its associate in China. Balance sheet liquidity is strong with low LDR of 87% and LCR of 140% above the minimum regulatory requirement of 100%. It remains a laggard and one of top picks for the sector. Maintain our BUY recommendation with unchanged TP of RM26.90/share based on a blended forward CY26 P/BV of 1.1x.

• 1QFY25 earnings of RM1.09bil were within expectations accounting for 24.8% of our and 24.1% of consensus estimate. 1QFY25 earnings grew by 5.8% YoY underpinned by stronger operating income of 14.6% YoY and lower provisions. Net interest income (NII) rose by 10.5% YoY from loan expansion and NIM improvement.
• The group's loan growth moderated to 6.9% YoY in 1QFY25 due to FX impact. Domestic loans expanded by 7.6% YoY above the industry's 5.6% YoY. NIM expanded by 3bps QoQ in 1QFY25. Excluding FX impact, loans grew by 8.3% YoY. Loan growth was supported by expansion in mortgages, auto financing, SME, commercial banking loans. Net interest margin (NIM) continued to improve sequentially by 3bps QoQ to 1.92% in 1QFY25 supported by loan expansion and liabilities management. Management alluded to maintaining its NIM at this level or better in the next two quarters.
• NOII in 1QFY25 climbed by 32% YoY driven by higher fees, trading, investment income and forex gains. Wealth management and bancassurance income rose by 32.4% YoY while Global Markets franchise sales climbed 60.3% YoY. In contrast, credit card related fees were flat. CI ratio for 1QFY25 improved to 39.1% owing to a positive JAW of 2.2% YoY.
• Still a robust contribution from associates with a stable asset quality. The share of profits from its associates, BOC and Sichuan Jincheng Consumer Finance Limited's rose 5.7% YoY accounting for 28% of group 1QFY25 PBT. GIL ratio was stable at 0.54%. Net credit cost in 1QFY25 of 0.02% was lower than management's guidance of <0.10% for FY25. .

Source: AmInvest Research - 28 Nov 2024