In RHB Research’s Corporate News Updates (dated July 22) has maintained “BUY’ on Hong Leong Bank and target price (TP) of MYR23.70, with 18% upside and c.3% yield. The research house’s check on Bank of Chengdu (BOCD) reveals it has minimal exposure to Chinese property developers in financial distress. With a robust loan loss coverage of >430%, it is believed the Chinese lender will be able to comfortably absorb any potential rise in mortgage NPLs.
China’s mortgage boycott. Homebuyers in China are refusing to pay mortgages on properties bought but for which their financially strapped developers cannot finish. The protest is said to involve >230 delayed projects in c.86 Chinese cities. On 18 Jul, Fitch Ratings said: “Smaller and regional banks located in less-developed regions that have a large and concentrated exposure to distressed developers are likely to be the most vulnerable, as most home builders that have experienced distress since the second half of 2021 have projects in lower-tier cities in China’s inner regions.”
Update from Hong Leong Bank. BOCD’s mortgages account for approximately 20% of total loans with sector GIL ratio at <0.5%. Management has done a deep dive on the Chinese lender’s mortgage portfolio and BOCD has minimal lending exposure to projects facing completion delays on new houses – as flagged by various media sources. Where there is exposure, HL Bank said construction was still progressing, albeit with some delays. BOCD did not observe any delinquencies or NPLs on these loans. Management expects minimal NPL risks arising from a possible abandonment of projects. BOCD is also closely monitoring property developers that have reported negative news. The Chinese bank does not have any direct lending to companies that have reported defaults in their bond repayments.
Implications for HL Bank. Based on the information above and Fitch Ratings’ findings, it is believed that BOCD will not be adversely impacted by the mortgage boycott. The research house holds the opinion that the Chinese bank’s robust LLC ratio of >430%, which provides a strong buffer for any unexpected deterioration in asset quality. BOCD accounted for 24% of HL Bank’s 9MFY22 (Jun) pre-tax profits.
Hence, the research house has continued to maintain its BUY call and MYR23.70 TP on HL Bank. Their GGM-derived TP includes a 2% ESG premium, which is based on their proprietary in-house methodology.
Downside risks include: i) Weaker-than-expected loan growth, ii) softer-than-expected NIMs, iii) lower-than-expected non-II, and iv) lower-than-expected profits from BOCD.
