KUALA LUMPUR (Aug 28): Hong Leong Bank Bhd (KL:HLBANK) is positioning its ability to deliver return on equity (ROE) improvement as its primary competitive advantage against its peers, as it looks to build on a strong financial performance for the year ended June 30, 2026 (FY2026).
CIMB Securities noted that Hong Leong Bank is targeting ROE of 11%-11.5% in FY2027, alongside other key metrics including 6%-7% loan growth, a net interest margin of 1.8%-1.9%, a cost-to-income ratio below 39%, and a net credit charge of below 10 basis points.
The bank's FY2026 core net profit came in at RM4.53 billion, reflecting a 3.5% increase year-on-year (y-o-y) — broadly in line with expectations at 103% of CIMB Securities' and 102% of the consensus forecasts. The positive results also set the course for a higher dividend payout ratio, which was increased to 50% from 46% in FY2025.
Analysts described 4QFY2026 as 'strong', with core net profit rising 14.2% y-o-y and 20.7% quarter-on-quarter (q-o-q), backed by credit recovery, more solid fund-based income (+9.7% y-o-y), and strengthened non-interest income (+5.9% y-o-y, +36.7% q-o-q).
Operating profit rose 4.6% y-o-y in FY2026, supported by sustained non-interest income growth of 3.2% y-o-y, underpinned by growth in wealth management (+19.9% y-o-y), global markets franchise sales (+18.5% y-o-y), and credit card fees (+11.3% y-o-y).
Expansions in the bank's loan portfolio also contributed to the growth streak, with loans growing 7.7% y-o-y, rooted in mortgages (+6.6% y-o-y), auto financing (+5.5% y-o-y), and domestic business loans (+7.8% y-o-y).
Despite persistent industry-wide net interest margin (NIM) pressures, Hong Leong Bank's differentiated funding strategy enabled sequential NIM expansion for two consecutive quarters (+1 basis point q-o-q each in 3QFY2026 and 4QFY2026). This reflects management's commendable efforts in mitigating NIM pressures, although FY2026's overall NIM was six basis points lower y-o-y at 1.84%.
Looking ahead, Hong Leong Bank indicated that its primary competitive advantage against peers depends on its ability to "deliver ROE improvement through a balanced mix of volume growth, funding quality, and fee expansion".
With its new strategy, Hong Leong Bank will prioritise retaining high-quality borrowers over high-yield lending margins, accepting slightly lower asset yields to protect credit quality. This loss would be offset by lower funding costs as Hong Leong Bank leverages its franchise and ecosystem-driven funding model to acquire current account and savings account (Casa) and small and medium enterprise (SME) operating deposits through relationship banking, supporting sustainable growth in low-cost deposits.
Beyond funding activities, the group's wealth management, global markets sales and transaction banking businesses are becoming increasingly important earnings growth drivers, supporting capital efficiency and revenue diversification under a capital-light fee income model.
Artificial intelligence (AI)-driven productivity gains and continued cost discipline are expected to support a more sustainable ROE trajectory, even in a structurally lower-margin operating environment.
On Bank of Chengdu Co Ltd, Hong Leong Bank is exploring up to a 5% stake divestment, subject to pricing and regulatory approvals.
CIMB Securities maintained its 'buy' rating on Hong Leong Bank with an unchanged target price of RM26.40, premised on a 1.23 times FY2027 price-to-book value target multiple and cost of equity of 9.75%.
While near-term ROE expansion remains slower than expected due to competition and Bank of Chengdu-related dilution impact, the broader structural investment thesis remains intact, with Hong Leong Bank continuing to demonstrate superior operational execution, strong funding franchise resilience, top-class asset quality, and scalable AI-led productivity advantages.
The upcoming transition to Basel 3.1 further supports the case for higher dividend optionality, and Hong Leong Bank remains one of CIMB Securities' top picks in the banking sector universe.
A final dividend per share of 80 sen has been proposed, with the total FY2026 dividend per share estimated at RM1.10, implying a dividend yield of 5.2%.