PETALING JAYA: The property crisis in China has plagued major banks there but Hong Leong Bank Bhd
’s (HLB) 19.8%-owned Bank of Chengdu (BOCD) is unlikely to be negatively affected.
Instead, Affin Investment Bank Research believes that BOCD will continue to benefit from robust infrastructure developments and economic growth in the Sichuan province, its growth rate is unlikely to moderate.
“We remain confident that BOCD is not directly exposed to China’s real-estate crisis, but has been a prudently managed bank indeed, with a very benign gross impaired loan (GIL) ratio.
“In the next 11 years, BOCD’s growth will be highly driven by various development and infrastructure projects in the trillion-yuan Chengdu-Chongqing Economic Circle. It has a proven track record in funding various infrastructure and developmental projects as a city commercial bank in Chengdu city,” the research house said.
It added that the Chengdu-based BOCD continued to deliver sound financials for the six-month period with return on equity at 18%.
The bank’s loans and deposits were growing at 23% year-on-year (y-o-y) and 15% y-o-y, respectively, while the GIL ratio stood at 0.66%.
“More importantly, BOCD has not reported major asset-quality issues with regards to its exposure in ‘Local Government Financing Vehicles’, which accounts for about 10% of its bond portfolio,” the research house said.
It expected BOCD’s contribution to HLB will continue to rise by more than 30% as a proportion of HLB’s financial year ending June 30, 2025 (FY25) to FY27 pre-tax profit.
However, the research house believes the key challenge for HLB is to balance its franchise and BOCD growth.
“The key challenge for HLB going forward is to grow its franchise in the domestic and Singapore markets in order to balance out the robust contribution coming from BOCD’s phenomenal growth rate (BOCD contribution is expected to remain above 30% in FY25-FY27),” it added.
That said, Affin Research said BOCD remained a cash cow and it will continue to adhere to a 30% payout policy, whereby HLB receives an annual dividend of around RM500mil.
It added that HLB’s valuations look undemanding and has reiterated its “buy” call with an unchanged target price of RM25.40.
