Can Hong Leong Bank's digital strategies accelerate productivity?

The bank was the first to adopt cognitive banking technologies in Malaysia.

Hong Leong Bank’s various digital strategies are accelerating its bid for greater efficiency and improved cost-to-income ratio from 43% to 40%, according to UOB Kay Hian. 

HLBK was the first bank in the country to adopt cognitive banking technologies by launching the first AI chat advisory app in partnership with IBM Watson.

The app was able to slash average talk time per customer from 4.5 minutes to just 1 minute.

“As the group adopts AI across more of its services and operations, management hopes that more headcount could be freed for higher-value banking activities to drive the group’s longer-term aspirations of lowering its cost-to-income ratio (CIR) to below 40% (1HFY18: 42.5%),” the report added.

Product holding per customer is also higher at digital platforms at 4.05x and 2.39x respectively compared to the non-digital platform at 2.17x and 1.24x respectively as the bank’s data analytics and AI capabilities are able to raise the speed of customer acquisition at lower costs.

Here's more from UOB Kay Hian: 

It is hard to quantify the financial impact from the digital efforts but easier to quantify on the cost side with management having indicated that cost savings have declined 3% from ongoing digitisation efforts. This is equivalent to 100bp and 15bp improvements in CIR and ROE respectively. Assuming the group is able to achieve a blue-sky CIR of 38% by FY19 from stronger-than-expected revenue productivity gains vs our 41% assumption, this could lead to a potential ROE of 11.1% and target price upside to RM20.66. However, realistically, even management would not commit to such aspirational targets in the near term.

HLBK has amongst the leanest staff cost structure with the lowest average cost per employee. Its productivity as measured by pre-provision operating profit per employee is also the second highest after Public Bank. However, when measured against a simple branch productivity angle such as loans per branch, it stacks up poorly against peers. This implies significant scope to either extract low-hanging cost savings from the rationalisation of its branches or sweat its relatively large branch network more effectively. The re-skilling of more back office staff into competent front-end sales staff in tandem with the group’s branch reconfiguration will help the group raise revenue productivity without the need for an expensive one-off staff cost rationalisation exercise.