• Maintain BUY and MYR26.60 TP, 30% upside, 4% FY26F (Jun) yield. We think Hong Leong Bank (HLB) could post mid-to-high single digit net profit growth YoY in 1HFY25 when it reports on 26 Feb. Key drivers, we think, will be strong income growth and (operating and credit) cost discipline, though Bank of Chengdu (BOCD) contributions could come in softer. HLB's resilient earnings and undemanding valuation underscore our unchanged BUY call.
• Expecting robust operating income growth... From our meeting with management, we gathered that HLB should see robust income growth in 2QFY25. NII should pan out decently, with loans growth hovering at the guided level of 6-7%, while NIM also held up well despite the seasonal deposit competition. In fact, loan growth might even exceed the 6-7% range, as QoQ MYR weakness could lead to some positive translation gains. On the other hand, we understand that non-II was exceptionally strong during the quarter, especially from treasury and markets income, perhaps driven by a conducive trading environment during the quarter. Fees also remained robust, particularly from client franchise sales and continued wealth management traction. All in, income growth should show strong YoY and QoQ growth, and this could help to offset any weakness from BOCD contributions (natural dilution of stake, some NIM pressure from China's policy rate cuts).
• ...leading to potentially lower CIR. Absolute opex could potentially see some increases, particularly from tech-related expenditure - including spending for a new transaction banking platform slated to go live in 2QCY25. However, the strong income growth expected should allow CIR to come in well below management's 41% guidance. We also do not expect any major surprises on credit costs, as asset quality remained benign. Recall that in 1QFY25, HLB incurred a credit cost rate of 2bps, significantly below its <10bps guidance, while still retaining its management overlay stock of MYR574m.
• Dividends. We think HLB could declare a 27 sen interim DPS, ie 8% YoY increase. This is in line with the mid-to-high single digit YoY growth that we are expecting for 1HFY25, ie we expect the payout ratio to hover at similar levels to the 24% in 1HFY24. That said, we think there is scope for HLB's dividends to surprise on the upside, as management had previously indicated that it intends to gradually increase its payout ratio to 40% (FY24: 33%), though no further specifications were provided.
• What are we watching out for? We expect management to share its utilisation plans for its management overlay stock, particularly if these can and will be reversed. While not necessary, this could provide some cushion in case BOCD contributions for the year pan out softer-than-expected. We would also like to hear some strategy-related updates on management's key focus areas, eg Johor, Singapore, and wealth management, among others.

Source: RHB Research - 12 Feb 2025