This article first appeared in The Edge Malaysia Weekly on December 22, 2025 - December 28, 2025

HONG Leong Bank Bhd (KL:HLBANK) (HLBB) recently indicated that it may eventually divest up to a 5% stake in its 17.8%-owned Bank of Chengdu Co Ltd (BoCD) as it looks to strengthen earnings contributions from its own core business, and analysts expect a portion of the proceeds to be paid out as a special dividend.

HLBB expressed its intention for the partial divestment at a CGS International regional financial conference earlier this month.

“HLBB could dispose of up to 5% stake in BoCD, according to the bank. HLBB said that the process for the partial divestment of its stake in BoCD would be extended into the financial year ending June 30, 2027 (FY2027),” CGS International Research says in a Dec 9 report that flagged a potential special dividend.

In response to questions from The Edge on the matter, HLBB stresses that it is in no hurry to trim its stake in BoCD.

Asked why it plans to reduce the stake and how it would be done, a spokesperson says: “No decisions have been made at this stage regarding our strategic stake in BoCD. Any figures or timelines reported previously were independent projections by external analysts.

“As BoCD has a sizeable contribution to the total group profits of approximately 30%, it is prudent to consider how we can have a larger business contribution from our core HLBB business.”

According to HLBB, it intends to remain as a strategic partner to BocD.

“Following the renewal of our five-year strategic alliance with BoCD in October 2024, we remain committed as a strategic partner and continue leveraging this linkage to build a meaningful presence in China.

“Any future strategic stake sale would strictly prioritise finding a partner capable of adding value to the BoCD business,” the spokesperson says.

Based on Shanghai Stock Exchange-listed BoCD’s closing price of RMB16.64 on Dec 19, HLBB’s 17.8% stake in the Chinese lender is valued at RMB12.54 billion (about RM7.26 billion, assuming 1RMB equals RM0.58). Selling a 5% stake at that price would fetch it RMB3.53 billion.

The stock has gained 1.9% year to date (YTD) for a market capitalisation of RMB70.53 billion. Over the last 12 months, the stock’s highest close was RMB19.925 (on June 26) while its lowest was RMB15.106 (Feb 25).

HLBB’s shares on Bursa Malaysia have been on a broad upward trend since Aug 4, moving up 21.6% to close at RM22.24 on Dec 19 — its highest this year — for a market capitalisation of RM48.21 billion. YTD, the shares are up 8.2%.

“Should HLBB pare down its stake in BoCD, the proceeds would be utilised to support the growth in non-BoCD businesses (mainly in Malaysia and Singapore) as well as paid out as a special dividend.

“Assuming HLBB were to sell a 5% stake in BOC at the closing price of RMB16.82 on Dec 8 for BoCD, the total proceeds received would be RM2.07 billion. Assuming half of this is paid out as special dividend, this would translate into a dividend per share of 47.7 sen, representing an additional dividend yield of 2.2%,” CGS International Research says in its Dec 9 report.

“HLBB thinks that reasonable pricing for the deal would be between 0.9 times and 0.95 times the book value of BoCD at end-September (which stood at RMB101.8 billion or RM59 billion based on assumed exchange rate of RMB1 for RM0.85). With this, the value of HLBB’s investment in BoCD would be RM10.5 billion for its total stake of 17.8% and RM3 billion for the 5% stake that could potentially be disposed of.”

In a Nov 28 report following HLBB’s 1QFY2026 financial results, Maybank Investment Bank Research estimated that every 5% BoCD stake sale could lift the group’s capital ratios by about 90 basis points (bps).

“Management does not see any inorganic growth opportunities outside of Malaysia in the near term, unless it is very attractive. As such, the alternatives would be either to look for M&A (mergers and acquisitions) opportunities within Malaysia and/or reward shareholders through the return of some capital,” it says, of the possible use of the proceeds.

HLBB’s BoCD acquisition cost of RM2.05 billion back in 2008 has been fully recouped through RM2.15 billion worth of dividends since then, observes Maybank IB Research.

That HLBB wants to eventually partially divest its BoCD holding comes as no big surprise. The Chinese lender has proven to be a successful investment for HLBB, delivering growth over the years that has significantly outpaced HLBB’s own business — even during recent times of slower economic growth in China.

But it poses a challenge for HLBB to balance out the robust earnings contribution from BoCD with that of its own franchise. Hence, paring its stake in BoCD may help.

Analysts note that in recent years, HLBB has indeed shown progress in growing its non-BoCD earnings. However, given BoCD’s continued strong growth, some question how HLBB will plug the earnings hole if it indeed sold as much as a 5% stake in its associate.

“There’s still a hole that needs to be filled,” a senior analyst tells The Edge.

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

“The bank’s strategy to strengthen non-BoCD earnings is demonstrating strong momentum, with core HLBB loans growing at a rate of 7%–8% and consistently outperforming the industry average of approximately 5%, and NOII contribution improving from below 20% to nearly 25%, a shift driven by robust growth in wealth management, advisory, and hedging solutions. Additionally, operations in Singapore and Vietnam have emerged as meaningful contributors to the bank’s overall performance during this period,” the HLBB spokeperson says.

In FY2025, loans from Singapore and Vietnam (in local currency) grew by a solid 16.8% and 17.7% respectively.

BoCD accounted for 31% of HLBB’s profit before tax (PBT) of RM5.13 billion in FY2024, and 27.9% of its RM4.63 billion PBT in FY2023. 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. In FY2025, BoCD’s contribution is estimated at around 30%.

BoCD posted 5% growth in profit after tax to RMB9.49 billion in the nine months of the financial year ending Dec 31, 2025. Loans grew by a strong 17% while its gross impaired loan (GIL) ratio was an impressive 0.68%, albeit slightly higher from 0.66% a year earlier.

It had a prudent loan loss coverage ratio of 433% and cost-to-income ratio of 26.4%. The bank achieved a robust return on equity (ROE) of 15.2%.

As for HLBB, in FY2025, it posted a 1.8% growth in net profit to RM4.27 billion. Excluding one-offs, growth was higher by 4.3% to RM4.38 billion. Loans grew by 7.8%, while its GIL ratio stood at a solid 0.54%. It achieved an ROE of 11.4%. In 1QFY2026, net profit stood at RM1.09 billion, up 0.1% year on year and 0.2% quarter on quarter.

Bloomberg data shows that of 17 analysts that track HLBB, 16 have a “buy” call on the stock while one has a “hold”, with the average 12-month target price at RM24.55. The bank’s biggest shareholders are Hong Leong Financial Group Bhd [KL:HLFG] with a 61.82% stake and the Employees Provident Fund, with 9.41% as at Dec 16.

“While near-term earnings growth remains steady, [HLBB’s] key rerating catalyst lies in capital upside from the optimisation of its BoCD stake and a potential 50bps capital uplift under the revised capital adequacy framework for Standardised Approach banks (in alignment with Basel 3.1). These two levers provide a credible pathway for special dividends and incremental capital returns in FY26–FY27,” says CIMB Securities in a Nov 9 report on banks. It maintained its “buy” call and raised its target price to RM24 from RM22.45.

Meanwhile, Blomberg showed 23 “buy” calls and one “hold” for BoCD, with the 12-month target price at RMB22.10. The bank’s biggest shareholders are Chengdu Jiaozi Financial Holding Group Co Ltd (20%) followed by HLBB (17.8%), Chengdu Industrial Capital Holding Group Co Ltd (6.06%) and HKSCC Nominees Ltd (6.06%). Many local and foreign fund managers have small stakes in the lender.

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