Is Hong Leong Bank Bhd Worth Investing In?

On 23 October 2017, I wrote an article on Hong Leong Bank Bhd (HLB). On that day, HLB was trading at RM 15.86 a share. Today, HLB’s stock price is RM 20.58 a share, some 30% appreciation within 12 months. Hence, it has outperformed stock prices of all listed local banks in Malaysia, including Public Bank Bhd.

In this article, I’ll share the latest results of HLB and discuss its immediate plans towards the future. Also, I would share a few valuation tools to share how I will personally assess an investment into HLB at RM 20.58 a share. Thus, here are 5 things to know about HLB before you invest.

#1: Asset Quality

Key Statistics FY 2018:

LAF Assets – RM 128.06 billion (As at 30 June 2018)

Residential Mortgage Assets – RM 61.37 billion (48% of LAF assets)

GIL Ratio – 0.87%

LIC inclusive of Regulatory Reserves – 155%

As at 30 June 2018, HLB has RM 128.06 billion in loans, advances, and financing (LAF) assets, continuing its growth at a moderate pace since 2014. From which, residential mortgages accounted for RM 61.37 billion (48%) of HLB’s LAF assets portfolio in the financial year (FY) 2018.

HLB has recorded Gross Impairment Loan (GIL) Ratio of 0.87% for its LAF assets in FY 2018. It is an improvement from 0.96% in FY 2017. At 0.87%, HLB boasted to have better LAF asset quality compared to peers as its GIL Ratio in FY 2018 is below the industry average of 1.58%.

HLB has recorded Loan Impairment Coverage (LIC) of 89%. If the regulatory reserve is included, HLB’s LIC is 155% in FY 2018. Hence, HLB has reserves which would act as a buffer to alleviate an increase in impairment losses of LAF assets when they arise in the future.

 

  

Source: Annual Reports of Hong Leong Bank Bhd

#2: Profitability

Key Statistics FY 2018:

Shareholders’ Earnings – RM 2.64 billion

Return on Equity (ROE) 2018 – 11.0%

Net Interest Income – RM 2.89 billion

Islamic Banking Income – RM 646.1 million

Profits from Bank of Chengdu Co. Ltd – RM 516.1 million

In FY 2018, HLB has made RM 2.64 billion in shareholders’ earnings, 23% higher than earnings of RM 2.15 billion in FY 2017. Thus, it tallies with HLB’s growth in stock price over the last 12 months. After all, a growth in profits often leads to a growth in stock prices. Logically, isn’t it?

Its earnings are derived mainly from net interest income (that’s why we assess a bank’s LAF assets), Islamic Banking operations, and HLB’s 18% shareholdings in Bank of Chengdu Co. Ltd. Its net interest income and Islamic Banking income had grown moderately which is in tandem with HLB’s growth in LAF assets.

On 31 January 2018, Bank of Chengdu Co. Ltd, an associate bank of HLB which HLB previously owned 20% shareholdings since 2008, completed its IPO listing on the Shanghai Stock Exchange (SSE). Subsequently, HLB’s shareholdings were diluted from 20% to 18%.

In 2018, the bank had contributed RM 556.1 million in profits to HLB, which is the highest contribution made since 2008. The market value of HLB’s interests in Bank of Chengdu Co. Ltd was RM 3.63 billion at CNY 9.23 a share at the time of writing (4 October 2018).

Source: Annual Reports of Hong Leong Bank Bhd

#3: Capital Management

Key Statistics:

Total Capital Ratio – 16.3%

Fitch Ratings Ltd: Long-Term Rating – A- Stable (6 August 2018)

Moody’s Investors Services Ltd: Long-Term Rating – A3 stable (17 January 2018)

Rating Agency Malaysia Bhd: Long-Term Rating – AAA stable (2 November 2017)

As at 30 June 2018, HLB has reported Total Capital Ratio (TCR) of 16.3% which is an improvement from 15.8% in FY 2017. Comfortably, its TCR has surpassed the minimum regulatory and capital buffer requirement of 9.875% and 10.50% set for the year 2018 and 2019.

It means HLB has maintained sufficient capital to keep its TCR above minimum levels, to weather through stressed economic environments, and to support its business growth to maximize wealth for shareholders. As such, HLB was given a stable outlook by rating agencies such as Fitch, Moody’s and RAM respectively.

#4: Digital Capabilities

HLB is enhancing its digital capabilities as it is progressing to be a digital and an innovative ASEAN financial services enterprises. In FY 2018, HLB launched Hong Leong ConnectFirst for its SME and corporate clients. Shortly, it partnered with Tencent to enable WeChat Pay as an effective cross-border payment solution between Mainland Chinese and Malaysian users.

Moving forward, HLB has allocated RM 30 million worth of capital expenditures (CAPEX) to convert 50 out of 250 existing branches to a new digital format over the next 2 – 3 years. On 2 August 2018, HLB has successfully launched its brand new digital branch at Burmah House, Penang. As a result, it had reduced about 25% of spaces previously used for backroom operations, which now, is used for customer service. It reduces operating cost, free-up retail spaces and enhances customer experiences with HLB.

#5: Valuation

Key Statistics:

Ticker Symbol – KLSE: HLBANK / KLSE: 5819

Stock Price – RM 20.58 (4 October 2018)

Market Capitalization – RM 42.1 billion (4 October 2018)

Current P/E Ratio – 15.95

Current P/B Ratio – 1.76

Current Dividend Yield – 2.33%

In FY 2018, HLB has reported making RM 1.29 in earnings per share (EPS) and thus, its current P/E Ratio is 15.95, above its 5-Year P/E Ratio average of 12.81. Its net assets a share is RM 11.68. Thus, its current P/B Ratio is 1.76, above its 5-Year P/B Ratio of 1.44.

HLB has declared RM 0.48 in dividends per share (DPS). Hence, the gross dividend yield is 2.33% if I invest in HLB at RM 20.58 a share, below its 5-Year Dividend Yield Average of 2.57%.

VIA Verdict

HLB has delivered its best financial results in 2018 and thus, continuing on its track record of growth in asset size, profits, and dividend payouts. In FY 2019, HLB intends to carry on its digital efforts and has set the following targets:

1. Net Interest Margins > 2% (2018: 2.1%)
2. Cost-to-Income Ratio < 43% (2018: 42.6%)
3. GIL Ratio < 1% (2018: 0.87%)
4. Return on Equity = 11% (2018: 11.0%)

It means HLB intends to replicate its achievements for 2018 in FY 2019. Thus, here is the 64,000 Question: is HLB still a good investment at RM 20.58?

Source: Google Finance

Here is my take:

Evidently, HLB is a better investment when its stock price was trading around RM 12 – RM 14 from 2013 to 2017 where its P/E Ratio was trading around 12. If we can turn back time, would you then consider an investment in HLB?

If you are interested in HLB because it had risen to RM 20.58 a share presently, then, pardon me. Chances are, you are speculating as your modus operandi of stock picking is based on the ‘Greater Fool Theory’ which is primarily based on ‘emotions’ rather than ‘logic’, ‘facts’, and ‘data’. It is hard to ‘buy low, sell high’ if you pick your stocks based on recent spikes in stock prices.

You may ask, ‘But, won’t it continue to go up?’

My answer is, ‘It could happen. I don’t know. HLB could go up, down, and even sideways. To me, the more important question to ask is whether you intend to keep or perhaps, buy more HLB in your portfolio should its stock prices drop in the future. Stock investing is not about predicting future market movements. It is, to me, an accumulation of shares of fundamentally good companies at their lowest possible prices.’

So, is HLB a good deal to you? I’ll leave that to you to decide. You call the shots.

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