Stellar Performance By China Unit Raises Hong Leong Bank’s Prospects
CIMB Investment Bank Bhd (CIMB Securities) has upgraded its rating on Hong Leong Bank Bhd (HLBB) to BUY from Hold, with an increased target price of RM21.50, citing improved prospects driven by its China associate’s stellar performance and anticipated dividend yield uplift following Basel III implementation. The bank’s strong exposure to Bank of Chengdu Co Ltd (BOCD), in which it holds a 17.8% stake, remains a key valuation anchor.
BOCD’s share price surged 21.7% from a February low, reaching RMB19.57, partly due to positive sentiment following the finalisation of US tariffs on China. CIMB noted that market sentiment towards BOCD has turned decisively bullish, with 19 of 21 brokerages currently issuing Buy ratings. HLBB’s share of BOCD’s market capitalisation jumped by nearly RM1 billion since February, reflecting the rally. However, HLBB’s overall market cap softened by 9.3% over the same period, largely due to the one-off RM408 million dilution loss in 3QFY25.
Despite the recent drag, CIMB Securities said the dilution loss is unlikely to recur and believes the market has over-penalised HLBB’s domestic operations, whose implied value dropped by a sharper 13.5%. BOCD’s robust fundamentals, coupled with resilient credit quality and strong property-backed loans, are expected to continue supporting HLBB’s asset strength.
The house also revised its dividend payout assumptions upward, forecasting yields of 4.5% for FY26F and 5.1% for FY27F, underpinned by a rise in group CET1 capital under Basel III. HLBB’s projected net dividends per share have been raised to 88 sen for FY26F and 99 sen for FY27F.
On fundamentals, HLBB posted a core net profit of RM4.2 billion in FY24, and is expected to record RM4.3 billion in FY25F despite a marginal dip in FY26F earnings. CIMB attributed this to prudent provisioning and noted the bank’s loan loss coverage, though reduced to 95% in 3QFY25, remains adequately backed by collateral and cumulative provisions.
With asset quality trends consistently outperforming the industry, and dividend visibility improving, CIMB Securities sees the risk-reward balance now skewing favourably for HLBB. The brokerage maintained its fair value P/BV at 1.1 times and raised its FY26F return on equity forecast slightly to 9.8%.
