Hong Leong poised to benefit from China associate's share price rally

KUALA LUMPUR: Hong Leong Bank Bhd is set to attract renewed investor interest following the strong performance of its China associate, Bank of Chengdu Co Ltd, whose share price recently surged to a record high despite geopolitical challenges.
In a research note, CIMB Securities said Bank of Chengdu's stock hit RMB19.57, up 21.7 per cent from its February low, as market sentiment improved after the finalisation of United States tariffs on China.
Hong Leong Bank holds a 17.8 per cent stake in Bank of Chengdu, which remains a key contributor to its earnings.
"The risk-reward trade-off for Hong Leong is now tilted to the upside," CIMB Securities said, upgrading its rating on the stock to "buy" from "hold" and raising the target price to RM21.50 from RM21.40.
The firm noted that Bank of Chengdu's improving outlook and consensus expectations for a 4.2 per cent year-on-year rise in pre-tax profit for financial year 2026 (FY26) contrast with its earlier conservative estimate of a 5.8 per cent decline.
Aligning projections with market consensus could imply a potential target price of RM24.10 for Hong Leong, it said.
Despite Bank of Chengdu's positive momentum, Hong Leong's own market capitalisation declined 9.3 per cent to RM42.1 billion since February, partly due to a one-off dilution loss of RM408 million. Of this, RM393 million was linked to the conversion of Bank of Chengdu's convertible bonds.
"Hong Leong confirmed that this is a one-off loss," CIMB Securities said, adding that the dilution was caused by Bank of Chengdu's bondholders converting at a lower price, compared with Hong Leong's earlier and more favourable conversion.
Bank of Chengdu's contribution to Hong Leong's group pre-tax profit stood at 25.7 per cent in the March quarter, maintaining its critical role in Hong Leong's earnings base.
The Chengdu-based lender reported a robust return on equity of 14.8 per cent, with loans and deposits rising 17 per cent and 15 per cent year-on-year, respectively.
Asset quality at Bank of Chengdu also remained solid, with a gross impaired loans ratio of just 0.66 per cent and loan loss coverage at 456 per cent.
CIMB Securities noted that only six to seven per cent of Bank of Chengdu's loans are linked to the manufacturing sector and are largely domestically focused, making the impact of US tariffs manageable.
Meanwhile, Hong Leong's asset quality continued to outperform industry standards. Its gross impaired loans ratio stood at 0.57 per cent as at March, lower than the banking industry's 1.42 per cent.
Hong Leong's loan loss coverage dropped to 95 per cent in the third quarter of 2025 from 139 per cent in the previous quarter due to a RM399 million write-back of pre-emptive provisioning.
Despite this, the firm said it remains "not overly concerned" as about half of the impaired loans are backed by strong property collateral and the remainder is covered by provisioning at 1.8 times.
"Looking ahead, we expect Hong Leong to rebuild its loan loss cover in the coming quarters, consistent with its traditionally conservative credit culture," it said.
CIMB Securities also raised its dividend payout forecasts for Hong Leong, projecting yields of 4.5 per cent for FY26 and 5.1 per cent for FY27, driven by improved capital ratios under Basel III.
The dividend per share is expected to rise to 88 sen in FY26 and 99 sen in FY27, from 71 sen previously.
Key catalysts for Hong Leong include its stable asset quality and higher dividend payouts, while downside risks include potential spikes in credit costs and elevated funding costs.
Shares of Hong Leong last traded at RM19.40 apiece, valuing the lender at RM42.05 billion.

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