PETALING JAYA: Hong Leong Bank Bhd (HLB) expects to achieve overall loan growth of 7% to 8% under its mid-term transformation plan, spanning three to five years.

The target is not a significant bump up from the bank’s expected loan growth of 7% for its financial year ended June 30, 2023 (FY23), analysts said.

According to a report by RHB Research, HLB’s loan yields may be pressured due to the focus on quality customers and loan mix (that is, growth in the lower-yielding Singapore market), but this would be mitigated by stronger small and medium enterprises (SME) net interest margins (NIMs) and non-interest income (NII) contribution.

In addition, RHB Research said HLB’s credit cost should stay contained.

Citing HLB management, RHB Research said the financial institution expected SME loan growth to accelerate to around 15% over the next three to five years, against 10% in FY23, while its overseas loan mix was expected to rise to 12% over this period from 8% in FY23.

“Overall, the reinvestment of profits should ensure capital sufficiency to support this growth,” RHB Research wrote following a recent investor briefing by HLB.

The brokerage noted that HLB’s mid-term transformation plan entailed a combination of leveraging its existing strengths of solid asset quality and cost efficiency, while pulling key levers in loans, NII and regional presence to drive incremental growth.

Ultimately, the goal was to raise its return on equity (ROE) to 12%-12.5% over the next two years, rising to more than 12.5% within five years, which HLB is confident of achieving in the third year of its plan.

“Overall, we think the targets look reasonable,” RHB Research said, noting in FY23, HLB’s ROE was 11.8%.

The research house said three key areas had been identified to drive incremental ROE. These were an acceleration in SME and overseas (mainly Singapore) loan growth; stronger NII contribution from franchise sales, wealth and trade as well as other business and corporate banking fees; and higher regional pre-tax profit.

Under the plan, NII was expected to be the major ROE growth driver, accounting for 40% to 45% of incremental ROE, while loan growth was expected to represent 20% of the ROE enhancement.

Meanwhile, AmInvestment Bank Research noted HLB aspired to be among the top three in terms of the best-managed bank domestically in three to five years.

“Aside from ROE, it is aiming for a cost-to-income ratio of 40%, credit cost of 10 basis points, current account/savings account mix of 35% and NII to total income ratio of more than 25%,” the brokerage said.