Less ESG concerns seen for Hong Leong Bank


  • Analyst Reports
  • Wednesday, 29 Jul 2020

Being largely retail focused in the local banking scene, Hong Leong Bank Bhd (HLB) has less environmental, social, and governance (ESG) concerns pertaining to its corporate exposure.

PETALING JAYA: Being largely retail focused in the local banking scene, Hong Leong Bank Bhd (HLB) has less environmental, social, and governance (ESG) concerns pertaining to its corporate exposure.

In separate reports on the bank and its parent company, Hong Leong Financial Group Bhd (HLFG), Maybank Investment Bank Research noted that other financial services such as insurance and investment banking are housed at HLFG and this in a way, helps to reduce overall ESG risk.

“Domestically, HLB’s position as predominantly a retail bank serves to mitigate much of the risk associated with corporate accounts, and the bank has low exposure to the more ESG problematic commodity segments such as palm oil (1.5% of total loans) and O&G (0.4%), ” noted analyst Desmond Ch’ng in the reports.

HLB could face exposure risks in China where it owns 18% in Bank of Chengdu (BoC).He said HLB may have to monitor potential ESG risks at BoC, which contributed 17% of the group pre-tax profit in financial year 2019 (FY19). While HLB has two board representatives at BoC, it may not have a meaningful say in the ESG direction of the Chinese bank, he said in the reports yesterday.

Capital-wise, Maybank IB notes that HLB continues to be one of the most prudently managed banks in the country, with a self-imposed loan/deposit ratio cap of 85%. Its asset quality is among the highest in the industry, while its common equity Tier-1 or CET1 ratio of 12.9% as at end-March 2020 is comfortable. Should it choose to release its regulatory reserves, the research firm expects its CET1 to be enhanced by a further 60 basis point (bps).

Maybank IB noted that the bank’s new digitalisation initiatives in FY19 contributed to a cost reduction of 2.6% of the group’s total cost base.

HLB had allocated half of its total capex for digital initiatives in FY19 and will extend this digital footprint across its international offices and branches in Cambodia, Vietnam and Singapore, according to the research firm.

Where HLFG is concerned, the stock is seen as a more diversified entity. However, it derives more than 90% of its earnings from HLB, which is the fifth largest lender by assets.

This, in turn, places much of the ESG onus on its 65.6%-owned HLB, which the research firm said “displays no exceptional risks not typical of a large bank for ESG”.

Maybank IB maintains a Hold call on both stocks, with a 12-month target price of RM14.30 for HLB that’s pegged to a price to book value of one time. For HLFG, it has a RM14 target price.

According to the research firm, any slowdown in the domestic economy would have a negative impact on HLB’s earnings, as would a pick-up in deposit competition. Meanwhile, deterioration in China’s economic outlook, particularly in Sichuan Province where BoC is located, would also negatively impact associate contributions.

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