Hong Leong Bank Bhd’s goal to raise its ROE to between 12 and 12.5% over the next two years, and more than 12.5% within five years look reasonable, RHB Investment Bank (RHB IB) said.
Hong Leong Bank briefed analysts and fund managers yesterday on its transformative 3 to 5 year, which entails a combination of leveraging off its existing strengths, including solid asset quality and cost efficiency, while pulling key levers in loans, non-II and regional presence to drive incremental growth.
Post-briefing, RHB IB said the group’s ultimate goal is to raise its ROE to between 12 and 12.5% over the next two years (FY23: 11.8%), rising to more than 12.5% within five years,
“HLB is confident in achieving in the third year. Overall, we think the targets look reasonable,” it said today (Dec 6) in its Malaysia Company Update.
The research house keeps its BUY call and RM23.20 TP, 21% upside and c.3% FY24F (June) yield.
It noted that the group has listed three key areas drive incremental ROE, one, by an acceleration in SME and overseas (mainly Singapore loans growth (20% of the ROE enhancement); two stronger non-II contribution from franchise sales, wealth and trade as well as other business and corporate banking (BCB) fees; and lastly higher regional PBT contribution.
“Non-II is expected to be the major ROE growth driver, which is around 40 to 45% of incremental ROE. This key drivers are in addition to its business-as-usual activities,” it said.
RHB IB said in order to achieve HLB’s targets, all key business pillars will have a role and need to contribute including personal financial services and BCB (to drive SME and mid-market/corporate loans and cheap deposit growth as well as seeking non-II opportunities).
The other two pillars are regional wealth management (grow fee income via bancassurance, unit trust and treasury), and regional markets, which mainly relates to SG operations and the SME segment.
Other highlights from the briefing include the group will need to make investments in some of these initiatives, for example, branch transformation, building WM teams – management reassured investors that the investments will be paced out to keep CIR under control.
“On loans growth, management guided for SME loans growth to accelerate to 15% over the next 3-5 years vs 10% in FY23, while overseas loan mix is expected to rise to 12% over this period from 8% in FY23.
“Overall, the reinvestment of profits should ensure capital sufficiency to support this growth. HL Bank also highlighted that overall loan growth would be 7 to 8% over the mid-term plan, versus 7% in FY23.
“That said, loan yields may be pressured due to the focus on quality customers and loan mix but this would be mitigated by stronger SME NIMs and non-II contribution, plus credit cost should stay contained,” it said.
It added HLB had earlier announced plans to allow its LDR to rise towards industry levels. Finally, it said its senior level management compensation is fully aligned with these targets.
