This article first appeared in The Edge Malaysia Weekly on May 5, 2025 - May 11, 2025

OF Malaysia’s 10 public-listed banking groups, Hong Leong Bank Bhd (KL:HLBANK) (HLBB) stands out as having the highest exposure to China, given that it holds a 17.8% equity stake in Bank of Chengdu Co Ltd (BoCD), which contributed to around 30% of its earnings in the past two fiscal years.

That stake has come into focus given the ongoing trade war between the US and China, which stems from US President Donald Trump imposing a punishing 125% tariff on Chinese imports in early April (for a total of 145%) and China retaliating with the same rate.

With China facing potentially slower economic growth and looser monetary policy, it remains to be seen how Chinese lenders, including BoCD, will be impacted. As it stands, banking sector margins there are at the narrowest on record. The International Monetary Fund recently cut its growth forecast for China to 4% from an earlier prediction of 4.6% in January, amid evolving tariff developments.

“HLBB has the biggest exposure to China because of the BoCD stake,” a regional banking analyst tells The Edge. “It’s hard to say yet how much the tariffs will impact BoCD. It is likely to hit the exporters first, but I suspect BoCD’s customer base is very much domestic-focused. There will be second-order effects though, as supply chains start to get affected, but this may take a bit more time to filter through.”

BoCD accounted for 31% of HLBB’s profit before tax (PBT) of RM5.13 billion in the last financial year ended June 30, 2024 (FY2024). In the previous year, it contributed to 27.9% of its PBT of RM4.63 billion. (In those years, HLBB’s stake in the lender stood at 19.8%, but it was later diluted to 17.8% after BoCD’s minority shareholders exercised convertible bonds).

Under HLBB’s three- to five-year transformative plan, which it unveiled in December 2023, it is making a conscious effort to moderate the robust earnings contribution from BoCD by growing its own core businesses at a stronger pace than before. This includes putting a bigger focus on expanding its non-interest income and lifting the earnings contribution from its other overseas markets, particularly Singapore.

As at 1HFY2025, BoCD’s contribution to HLBB’s PBT fell to 28.3% compared with 31.1% in the same period a year earlier, but remains sizeable.

A regional commercial lender, BoCD is based in Chengdu — the capital city of Sichuan — which saw economic growth of 5.7% last year, outpacing the country’s 5% expansion.

According to group managing director and CEO Kevin Lam, HLBB has been engaging with BoCD about the impact of the US tariff. The current expectation is that the impact will not be significant.

“Based on their current impact analysis, BoCD’s key source of loan growth and earning base are largely from sectors that have minimal reliance on external markets, thus the impact on loan growth and profitability is expected to be low and within [a] manageable level for FY2025,” he says in an email response to questions from The Edge.

Furthermore, he points out, BoCD’s loan exposure to the manufacturing sector stood at 6% to 7% of its overall loan base, with the bulk of the portfolio consisting of entities located within inland provinces of West China (Chengdu, Chongqing and Xi’an), with key sources of income and revenue from domestic markets.

“This is largely different from those entities that are located in coastal provinces of China, which will have a considerably higher impact from tariffs,” Lam says.

Nevertheless, BoCD has in place ongoing monitoring, via the tracking of market changes and periodic post-lending account review, he adds. “They will be able to monitor any resulting significant adverse impact on borrowers and their business value chain, and to take prompt management actions where necessary. We believe BoCD is in a solid position, with a low gross impaired loan (GIL) ratio of 0.66% and loan impairment coverage of 456% [providing] an adequate buffer to manage any potential risks.”

As for HLBB, Lam says a pickup of its core businesses will enable it to moderate the profit contributions from BoCD.

“With potential moderation to BoCD’s growth to low double-digit, coupled with the natural dilution of our stake in BoCD, we believe that the pickup of our core businesses will allow us to moderate profit contribution from BoCD to manageable levels of between 25% and 30%, as seen in our recent results,” he says.

Asked if HLBB has plans to reduce its stake in BoCD from 17.8% currently, Lam did not provide a direct answer. “The bank’s investment in BoCD has been fruitful and remains accretive to return on equity (ROE), and we look forward to continuing our strategic long-term relationship with BoCD, as seen in the extended five-year strategic alliance with BoCD in October 2024. 

“At the digital and technology front, China continues to be the world leader in digital banking and payments. There are many things that we can learn and the collaboration with BoCD allows us to further step up our digital capabilities to provide innovative products and solutions to our customers.”

Malaysia will also be hit with a 24% tariff by the US in July unless it is successful in negotiating a lower rate. According to Lam, HLBB’s exposure to export-related loans is “minimal”.

“HLBB’s direct exposure is minimal, as export makes up a small fraction of the bank’s trade loans/financing, which are largely domestic oriented. Similarly, our portfolio of SME (small and medium enterprise) customers are predominantly from the wholesale and retail trade sector, whereby a large portion of their businesses are domestic focused.

“Notwithstanding, the bank will remain vigilant and watchful of any indirect impact from these trade policies and stands ready to support any business opportunities arising from these potential shifts, with a ready suite of product offerings, both domestically as well as via our regional offices,” he says.

Meanwhile, HLBB is set to announce its 3QFY2025 financial results later this month, but analysts doubt the January-March quarter will reflect much of the trade uncertainties given that the narrative intensified only towards the end of that period. In 1HFY2025, its net profit grew 5.7% to RM2.24 billion on the back of a 13% expansion in revenue to RM3.23 billion.

“We earlier lowered our forecast for BoCD’s PBT by 10% per annum owing to the uncertainty arising from the external tariff, leading to a projected decline of 8.7% year on year in HLBB’s associate pre-tax profit for FY2026. Pre-tax contribution from BoCD is expected to decline to 26%-27% in FY2026 and to 26% in FY2027, from 30.9% FY2024, based on our estimates,” CIMB Securities says in an April 21 report.

It maintained a “hold” call and target price of RM21.40, based on an ROE forecast of 9.7% for FY2026 and a fair price-to-book value of 1.1 times the forecast earnings.

Bloomberg data shows that there are 16 “buy” calls on HLBB, and one “hold” with the average 12-month target price at RM24.63, which suggests further upside from its closing price of RM19.98 last Wednesday (April 30). At that price, HLBB had a market capitalisation of RM43.31 billion.

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