Investors who bought into Hong Leong Bank Bhd just over three years ago would have enjoyed a decent capital gain, thanks to a strong surge in its share price this year.

The stock appreciated by 25.4%, from RM12.49 to RM15.66, between April 1, 2014, and June 30, 2017 — the period of review for The Edge Billion Ringgit Club (BRC).

While that only translates into a single-digit 7.2% annualised return over the period of three years and three months, it is ahead of six other large banking peers that are also BRC members. This year alone, Hong Leong Bank saw a 17.3% gain up to the cut-off date.

The strong gain came on the back of a solid recovery in profitability at Bank of Chengdu Co Ltd (BOC), a China-based lender in which Hong Leong Bank has a 20% strategic stake. BOC’s profit contribution to Hong Leong Bank improved 3.7% year on year to RM242 million in the nine months ended March 31 (9MFY2017), underpinned by a strong 25.9% y-o-y rebound in the third quarter. It accounted for 11.7% of Hong Leong Bank’s profit before tax in 9MFY2017.

BOC’s recovery, deemed to be sustainable after a strong bout of loan loss provisions since 1QFY2016, was the main reason for a slew of target price and earnings upgrades on Hong Leong Bank by analysts right after the lender released its 3QFY2017 results on May 29. This led to a surge in its share price in June and July, with the counter peaking at the year’s high of RM16.30 on July 5.

Given the strong price appreciation, some now see limited upside for the stock, although they continue to like the lender’s strong fundamentals. Bloomberg data shows that of 18 analysts that track Hong Leong Bank, 10 have a “hold” call and eight have a “buy” with a 12-month target price of RM15.26. Its closing price on Aug 1 was RM15.70.

“While we continue to favour Hong Leong Bank’s strong fundamentals, which include its impeccable asset quality, liquid balance sheet and a turnaround for BOC, valuations are fair at this stage, in our view. We raise our FY18/FY19 earnings forecasts by 2% to 3% and our target price to RM15.90 (from RM15.60),” Maybank Investment Bank Research, which cut its call on the stock to “hold” from “buy”, says in a July 18 report.

Hong Leong Bank’s earnings in 9MFY2017 grew 24% y-o-y to RM1.66 billion, coming in within consensus estimates. The growth was supported by higher operating income, lower provisions and higher profit contribution from BOC. Annualised return on equity was at 10.4%, within the bank’s full-year target of 10% to 11%.

The bank is in a good position to grow earnings further. It is the only one of the country’s eight local lenders that has managed to see sequential growth in net interest margins (NIM) for four consecutive quarters.

“With the lowest loan-to-deposit ratio in the industry at 81.1% (industry: 88.8%), the group is in the strongest position to enhance NIM via more aggressive asset utilisation and/or effectively manage funding cost by only focusing on expanding CASA (current account and savings account deposits) versus more expensive time deposits,” notes UOB Kay Hian Research in a June 16 report.

The bank also continues to display strong asset quality, with one of the lowest gross impaired loans ratio in the industry, at 0.88%, and solid loan impairment coverage ratio of 106%. “Going forward, protection of our business franchise and profitability will remain our key priority,” says its group managing director and CEO Domenic Fuda.

Of late, given that banking industry conso-

lidation is again a hot topic — AMMB Holdings Bhd and RHB Bank Bhd recently called off talks — it has sparked speculation that Hong Leong Bank too may be propelled to size up for scale. Last month, it shot down as “speculative and untrue” a report about a possible merger with Alliance Financial Group Bhd.