A MEMBER OF THE TA GROUP
Monday, August 18, 2025
FBMKLCI: 1,576.34
Sector: Finance
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*
Hong Leong Bank Berhad: Sustained FY26 Growth Outlook
As Hong Leong Bank (HLBB) heads into FY26, we expect another year of steady, broad-based growth, supported by a stable macroeconomic backdrop. Structural drivers, including supply chain diversification, the Johor-Singapore Special Economic Zone (JS-SEZ), and the Northern Corridor, should continue to provide a meaningful lift to economic activity. Management also sees targeted, sector-specific opportunities that reinforce our positive outlook.
Healthy Loan Growth Momentum
Building on strong 9M FY25 loan growth of 7.2%, we project HLBB to sustain 7-8% loan growth through FY26-27. Following the recent OPR cut, management noted that there had been a modest pickup in loan applications, particularly in August, aided by greater clarity on tariffs and a more stable FX environment.
By segment, HLBB is well positioned to capture SME demand in high-growth industries such as E&E, healthcare, pharmaceuticals, renewable energy, halal food, logistics, warehousing, industrial real estate, and data centre supply chains. Management believes that its sector-focused teams bring both deep industry insight and strong client relationships, providing a competitive edge.
On the retail side, mortgages remain a core anchor, supporting cross-sell opportunities for CASA, credit cards, and auto loans. The bank also aims to grow higher-yield segments, such as auto, credit card, and personal loans, while managing unsecured exposure with discipline. Notably, we are optimistic about HLBB’s partnership with WeBank, which would see the deployment of AI to enhance auto and SME loan processes, improve customer engagement, speed of processing, and disbursement efficiency.
Bright Spot in Wealth Management and Bancassurance
Wealth management and bancassurance continue to build momentum for HLBB, with income rising 37.8% YoY in 9M FY25. The bank is strengthening its wealth platform by recruiting experienced talent from leading financial institutions and leveraging its strategic partnership with Lombard Odier to enhance its brand positioning and technical expertise. Singapore remains a key opportunity, particularly in serving Malaysian high-net-worth clients and family offices considering relocation to Johor under the JS-SEZ framework. In addition, HLBB aims to tap the sizeable commuter segment between Singapore and Malaysia through a “one account” cross-border offering, enabling seamless banking across markets.
Reshaping the Distribution Network
HLBB is in the midst of reshaping its distribution strategy, moving beyond traditional branch formats to create more targeted and high-impact customer touchpoints. The bank is rolling out flagship branches that offer a full suite of services, such as priority banking, SME business centres, Islamic banking, and bancassurance, while also introducing “iconic” branch designs to elevate brand presence.
HLBB is also looking to deploy “pop-up” branches in emerging development areas to accelerate community banking penetration. We see Community SME Banking as a key growth engine within the broader SME portfolio, posting 10.1% YoY growth in 9M FY25, well ahead of the SME book’s 6.8% expansion. This segment now represents roughly 38.5% of HLBB’s SME loan portfolio. We understand that the pop-up format is designed to enable proactive community engagement, allowing staff to acquire merchant accounts, drive QR payment adoption, and onboard new businesses with competitive, high-value product offerings. In our view, this agile, localised approach can strengthen HLBB’s foothold at fast-growing SME hubs.
Healthy Liquidity Buffers
HLBB maintains a healthy liquidity position, with its Loan-to-Deposit Ratio (LDR) steady at around 87%. With the broader banking system showing early signs of deposit growth acceleration, we see scope for HLBB’s deposits to strengthen further in FY26. This should be supported by ongoing enhancements to its transaction banking and cash management platforms, which offer tailored solutions for a wide range of clients, from SMEs to large corporates. On the retail side, CASA growth continues to gain traction, driven by mobile acquisition teams actively opening accounts and sustained engagement initiatives with employers and educational institutions.
Solid Asset Quality
We expect HLBB to steadily raise its loan loss coverage ratio to around 100% from 95% in the near term. Asset quality remains solid, with recent portfolio reviews of tariff-impacted clients, particularly in the E&E and machinery sectors, showing no material deterioration. While some customers have begun diversifying exports to alternative markets, the bank continues to monitor these accounts closely for any signs of slowdown.
Progressive Dividend Payout Guided
On capital management, HLBB continues to target improved shareholder returns. Ongoing internal optimisation and an anticipated 50-bps uplift in capital ratios ahead of Basel III reform implementation in July 2026 provide scope for higher payouts. Given this backdrop, we believe HLBB can deliver on its guidance to progressively raise the dividend payout ratio from FY24’s 34% (FY23: 32%).
Potential Downside Risk
For FY26, we see potential downside risk from net interest margin (NIM) compression. The recent OPR cut is expected to shave 3-4 bps off NIM, partially offset by a 1 bp uplift from the SRR cut. However, the possibility of a further 1-2 OPR cuts during the year could deepen the pressure. Management appears confident that any shortfall can be mitigated through stronger non-interest income contributions. Additional NIM headwinds may arise from ongoing deposit competition, although management observes that this competition is less intense than it was two years ago, along with highly competitive loan pricing, especially in the mortgage and SME segments.
Impact
We make no change to our earnings estimates pending the announcement of upcoming FY25 results. To recap, HLBB has maintained its FY25 guidance across key financial targets. Management expects loan growth to remain healthy, from 6% to 7%, supported by continued demand across retail and SME segments. NIM is projected to improve to between 1.85% and 1.95%, driven by proactive asset-liability management and a more favourable funding mix. Cost efficiency remains a key focus, with management aiming to keep the CTI ratio below 40%. Asset quality is expected to remain resilient, with the GIL ratio targeted below 0.65% and net credit cost anticipated to stay under 10 bps. Taken together, HLBB is guiding for an ROE of around 12% in FY25, compared to 11.8% in FY24.
Valuation and Recommendation
We maintain HLBB’s TP at RM23.59. Our valuation is based on an implied PBV of c. 1.25x based on the Gordon Growth Model and a 3% ESG premium. Buy maintained on HLBB.
Financial Summary (RMmn)
Profit & Loss (RM mn)
| FYE 30 June | 2023 | 2024 | 2025E | 2026E | 2027E |
|---|---|---|---|---|---|
| Interest income | 7,530.8 | 8,783.2 | 9,269.8 | 9,912.0 | 10,615.5 |
| Interest expense | (3,846.7) | (4,961.4) | (5,187.6) | (5,577.6) | (5,973.4) |
| Net interest income | 3,684.1 | 3,821.8 | 4,082.2 | 4,334.4 | 4,642.1 |
| Islamic banking income | 963.4 | 985.9 | 1,025.4 | 1,076.7 | 1,141.3 |
| Total non-interest income | 1,038.1 | 963.3 | 1,061.9 | 1,156.0 | 1,242.1 |
| Total income | 5,685.5 | 5,771.0 | 6,169.4 | 6,567.1 | 7,025.4 |
| Overhead expenses | (2,233.3) | (2,338.9) | (2,526.6) | (2,736.3) | (2,970.4) |
| Operating profit | 3,452.2 | 3,432.1 | 3,642.8 | 3,830.8 | 4,055.0 |
| Total loan loss provisions | (115.1) | 113.2 | (56.8) | (162.1) | (266.4) |
| Share of PAT of equity accounted as: | 1,289.5 | 1,588.9 | 1,498.7 | 2,249.9 | 2,609.9 |
| Profit before tax | 4,626.6 | 5,134.2 | 5,084.8 | 5,918.6 | 6,398.5 |
| Taxation | (808.4) | (938.0) | (915.3) | (1,065.3) | (1,151.7) |
| Net profit | 3,818.2 | 4,196.2 | 4,169.5 | 4,853.3 | 5,246.8 |
Balance Sheet (RM mn)
| FYE 30 June | 2023 | 2024 | 2025E | 2026E | 2027E |
|---|---|---|---|---|---|
| Cash and short-term funds | 8,206.8 | 5,790.2 | 4,763.0 | 5,458.8 | 4,999.9 |
| Deposit with FIs | 436.9 | 661.5 | 595.4 | 535.8 | 482.2 |
| Marketable securities | 65,080.7 | 72,251.4 | 75,863.9 | 79,657.1 | 83,640.0 |
| Total current assets | 73,724.4 | 78,703.0 | 81,222.3 | 85,651.8 | 89,122.1 |
| Net loans and advances | 179,902.8 | 193,304.5 | 208,577.9 | 225,276.5 | 243,312.1 |
| Fixed assets | 1,055.4 | 994.4 | 994.4 | 994.4 | 994.4 |
| Other long-term assets | 10,864.2 | 9,748.6 | 9,558.8 | 9,372.9 | 9,190.7 |
| Goodwill and Intangibles | 2,193.7 | 2,184.8 | 2,184.8 | 2,184.8 | 2,184.8 |
| Investment in associates | 8,713.0 | 9,639.4 | 10,603.3 | 11,663.7 | 12,830.0 |
| Statutory deposits | 3,396.9 | 3,214.5 | 5,100.6 | 5,469.6 | 5,866.2 |
| Total assets | 279,850.5 | 297,789.1 | 318,242.0 | 340,613.6 | 363,500.3 |
| Customer deposits | 211,651.8 | 220,432.8 | 235,863.1 | 251,194.2 | 266,265.8 |
| Deposits from other FIs | 9,593.8 | 11,370.9 | 12,735.5 | 14,136.4 | 15,550.0 |
| Bills and acceptances | 211.4 | 282.5 | 324.9 | 373.7 | 429.7 |
| Borrowings | 3,221.3 | 3,219.2 | 3,270.8 | 3,323.9 | 3,378.6 |
| Other liabilities | 21,185.5 | 25,189.5 | 28,383.5 | 32,068.8 | 36,331.8 |
| Total liabilities | 245,863.8 | 260,495.0 | 280,577.7 | 301,096.9 | 321,955.9 |
| Shareholders’ funds | 33,986.7 | 37,294.1 | 37,664.3 | 39,516.7 | 41,544.4 |
Key Financial Ratios
| FYE 30 June | 2023 | 2024 | 2025E | 2026E | 2027E |
|---|---|---|---|---|---|
| Return and efficiency | |||||
| ROE (%) | 11.8% | 11.8% | 11.1% | 12.6% | 12.9% |
| ROA (%) | 1.4% | 1.5% | 1.4% | 1.5% | 1.5% |
| Fee-based/total income (%) | 10.5% | 11.8% | 12.3% | 12.7% | 12.9% |
| Non-interest/total income (%) | 18.3% | 16.7% | 17.2% | 17.6% | 17.7% |
| Cost-to-income (%) | 39.3% | 40.5% | 41.0% | 41.7% | 42.3% |
| Forecast Revision | |||||
| Forecast Revision (%) | |||||
| Core net profit (RMmn) | 4169.5 | 4853.3 | |||
| Consensus | 4390.0 | 4634.0 | |||
| TA’s / Consensus (%) | 95.0 | 104.7 | |||
| Previous rating | Buy (maintained) | Buy | |||
| Consensus TP (RM) | 23.99 | ||||
| Financial Indicators | |||||
| ROE (%) | 11.1 | 12.6 | |||
| ROA (%) | 1.4 | 1.5 | |||
| CTI Ratio (%) | 41.0 | 41.7 | |||
| LD Ratio (%) | 89.3 | 90.5 | |||
| BV/ Share (RM) | 17.4 | 18.2 | |||
| Price/BV (x) | 1.1 | 1.1 | |||
| Balance sheet | |||||
| Loans growth (%) | 8.0% | 7.3% | 8.0% | 8.0% | 8.0% |
| Gross Impaired Loans ratio (%) | 0.6% | 0.5% | 0.6% | 0.6% | 0.5% |
| Loan loss coverage (%) | 214.6% | 154.9% | 186.7% | 171.6% | 176.1% |
| Deposit growth (%) | 7.3% | 4.1% | 7.0% | 6.5% | 6.0% |
| LD ratio (%) | 85.8% | 88.4% | 89.3% | 90.5% | 92.2% |
| CET1 (before dividend) (%) | 13.3% | 13.9% | 13.9% | 13.9% | 14.1% |
| Total capital (before dividend) (%) | 16.4% | 16.8% | 16.7% | 16.7% | 16.7% |
| Investment statistics | |||||
| PER (x) | 11.1 | 10.1 | 10.2 | 8.8 | 8.1 |
| PBT growth rate (%) | 6.0% | 11.0% | -1.0% | 16.4% | 8.1% |
| EPS (sen) | 176.1 | 193.6 | 192.3 | 223.9 | 242.0 |
| EPS growth rate (%) | 16.1% | 9.9% | -0.6% | 16.4% | 8.1% |
| BV per share (RM) | 15.68 | 17.20 | 17.38 | 18.23 | 19.17 |
| P/BV (x) | 1.25 | 1.14 | 1.13 | 1.08 | 1.02 |
| DPS (sen) | 59.0 | 68.0 | 73.0 | 78.0 | 82.0 |
| Dividend yield (%) | 3.0 | 3.5 | 3.7 | 4.0 | 4.2 |
Share Performance (%)
| Price Change | HLBK | FBM KLCI |
|---|---|---|
| 1 mth | 1.7 | 3.3 |
| 3 mth | (3.3) | 0.2 |
| 6 mth | (4.0) | (1.0) |
| 12 mth | 0.3 | (2.3) |
(12-Mth) Share Price relative to the FBMKLCI
Source: Bloomberg
Sector Recommendation Guideline
OVERWEIGHT: The total return of the sector, as per our coverage universe, exceeds 12%.
NEUTRAL: The total return of the sector, as per our coverage universe, is within the range of 7% to 12%.
UNDERWEIGHT: The total return of the sector, as per our coverage universe, is lower than 7%.
Stock Recommendation Guideline
BUY : Total return of the stock exceeds 12%.
HOLD : Total return of the stock is within the range of 7% to 12%.
SELL : Total return of the stock is lower than 7%.
Not Rated: The company is not under coverage. The report is for information only.
Total Return of the stock includes expected share price appreciation, adjustment for ESG rating and gross dividend. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting.
Total Return of the sector is market capitalisation weighted average of total return of the stocks in the sector.
ESG Scoring & Guideline
Displayed market leading capabilities in integrating ESG factors in all aspects of operations, management and future directions.
Above adequate integration of ESG factors into most aspects of operations, management and future directions.
+5% premium to target price
Adequate integration of ESG factors into operations, management and future directions.
+3% premium to target price
Have some integration of ESG factors in operations and management but are insufficient.
No changes to target price
Minimal or no integration of ESG factors in operations and management.
-3% discount to target price
-5% discount to target price
Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.
As of Monday, August 18, 2025, the analyst, Wong Li Hsia, who prepared this report, has interest in the following securities covered in this report:
(a) nil
Kaladher Govindan – Head of Research
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