Hong Leong doubles down on ESG for sustainable earnings

by ANIS HAZIM / pic by TMR FILE

HONG Leong Bank Bhd is expected to further enhance its environmental, social and governance (ESG) adoption by fully integrating ESG evaluation into its decision-making processes, as well as increasing renewable energy (RE) financing.

CGS-CIMB Securities Sdn Bhd analyst Winson Ng noted that Hong Leong Bank would also measure and disclose its greenhouse gas emission, and quantify and disclose the impact of climate change risks to its business.

Hong Leong Bank expects its ESG initiatives will help sustain its earnings by lowering the reputational and regulatory risks for not complying with ESG requirements and reducing its exposure to customers with high ESG risks.

“This is in line with our view as we do not expect Hong Leong Bank’s ESG initiatives to act as a material catalyst for its earnings,” Ng wrote in a research report last Friday.

He believes Hong Leong Bank has “one of the best ESG standards among Malaysian banks”.

The analyst said Hong Leong Bank takes the initiative to work with its borrowers to improve their ESG standards, as well as incorporating ESG evaluation in its loan approval process. The bank has good disclosure of ESG-related information.

The fifth-largest banking group in Malaysia by assets has classified 18% of its loans as having high environmental and social risks, and this include loans to companies involved in selected manufacturing (7% of total loan), palm oil (6%), mining (3%), non-RE (1%) and forestry (less than 1%).

Ng noted that Hong Leong Bank intends to bring down the ratio by working with borrowers in this category.

Hong Leong Bank reportedly had RE financing at RM1 billion as at end-March 2021, or 0.7% of its total loan.

CGS-CIMB reiterated its ‘Add’ call for Hong Leong Bank with a target price of RM20.78. The brokerage firm expects the bank’s core EPS growth to recover to 10% in the financial year 2021 forecast (FY21F).

“We see better-than-peers net interest margin and loan loss provisioning in the next few quarters as potential rerating catalysts for the stock,” Ng said.

Downside risks include a potential spike in gross impaired loan ratio and loan loss provisioning in FY21F-FY22F.

Hong Leong Bank’s shares closed 1.06% higher to RM19.04 last Friday, valuing the bank at RM41.27 billion.

The ESG thematic is increasingly becoming a major issue for corporates, as well as an opportunity.

MIDF Amanah Asset Management Bhd has launched its new ESG Mustadamah Fund, a readymade investment solution, for its local equity market.

The new ESG fund integrates ESG considerations based on FTSE4Good Bursa Malaysia Index’s constituent of Shariah companies, making it easier for clients to invest in a more sustainable future for Malaysia.

“The launch of the ESG Mustadamah Fund reflects the increasing appetite from clients to invest their money in a more sustainable future for Malaysia and it will enable our clients to make more impactful, relevant and sustainable choices through our new investment solutions.

“We hope this fund will address investors’ needs and priorities of more than just financial gains,” MIDF Asset Management CEO Mohamed Sany Mohamed Zainudin said in a statement last Friday.