Hong Leong Bank may reduce China stake as investment pays off

Its group earnings edge on overreliance on the Bank of Chengdu’s contribution.

Hong Leong Bank’s investment in the Bank of Chengdu (BOCD) has proven to be profitable, but the bank may choose to reduce its stake in the Chinese bank.

The Malaysian banking group’s 19.8% stake in BOCD is now worth MYR6.2b, against its cost of investment that was MYR2.1b in July 2008. BOCD’s contribution to Hong Leong Bank’s group earnings was 31% in FY2024.

Despite this, Hong Leong Bank is looking to scale back on its reliance on BOCD– and is mulling reducing its stake in the Chinese bank to as low as 15%.

BOCD has seen rapid earnings growth over the years, far outpacing the growth of Hong Leong Bank’s net profit outside of the Chinese bank.

“Whilst this seems like a good problem to have, management has acknowledged that its other core businesses are not growing as rapidly, and that this issue has to be addressed,” said Desmond Ch’ng, Maybank Investment Bank analyst. 

“To this end, [Hong Leong Bank’s] management is looking to promote growth at its other operations through various means such as interest margin improvements, wealth management/ fee-based income, higher earnings from its Singapore operations, and greater cost efficiencies through increased automation,” Ch’ng said.

Hong Leong Bank can cut its BOCD stake via converting about RMB5b in convertible bonds. This will dilute its stake from 19.8% presently to 17.8%. 

With two board seats on BOCD, management believes it would still be able to equity account for BOCD’s earnings with a 15% stake, Ch’ng noted.