Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value to RM21.90/share (from RM21.60/share) based on a higher SOP valuation. This is after rolling over our valuation for its 64.4%-owned Hong Leong Bank (HLBB) to FY20. We trim our net profit estimate for FY19/20/21 by 6.5%/4.4%/2.9% after factoring in higher funding cost and adjusting our CI ratio assumption upwards.

• HLFG reported a core net profit of RM463mil (-0.1% QoQ) in 3QFY19. Excluding total gains from the disposal of HLBB’s 37.0% stake in the JV company, Sichuan Jincheng Consumer Finance Limited totalling RM90.1mil, HLFG’s 9MFY19 core earnings of RM1.36bil (-6.4% YoY) were slightly below expectations, accounting for 67.8% of our and 67.9% of consensus estimates.

• HLBB posted a lower core PBT of RM2.4bil (-4.3%YoY) for 9MFY19 after excluding the aforementioned one-off gains from divestment of shares in the JV company. HLBB’s core revenue was softer as interest income was impacted by higher funding cost while NOII declined due to a drop in Treasury’s investment and trading income. The share of profits from HLBB’s associates which included Bank of Chengdu rose marginally by 0.5% YoY to RM421mil.

• Asset quality of HLBB remained strong with a low GIL ratio of 0.80% against the industry’s 1.5%. HLBB’s net credit cost was -0.03% in 9MFY19. Its liquidity remained strong with a gross LD ratio of 82.0%. Meanwhile, loan impairment coverage including regulatory reserves remained high at 195.8% reflecting the commercial bank’s prudent stance.

• HLA Holdings, the group's insurance division achieved a pre-tax profit of RM224.7mil (-9.4% YoY) for 9MFY19. This was due to higher operating expenses of RM23.1mil and a decline in share of profits from associates of RM7.5mil. HLA's management expense ratio stayed low at 6.3%.

• Its investment banking division under Hong Leong Capital (HLC) reported a decline in PBT to RM55.9mil (-3.6% YoY) for 9MFY19. Lower earnings from IB and stock broking were partially offset by stronger contribution from the fund management and unit trust businesses.

• The stock remains a lower cost of entry to gain exposure to HLBB. This is based on HLFG’s market cap of RM21.7bil which is a 12.9% discount to HLBB’s RM24.9bil for the 64.4% stake in the latter.

• A second interim dividend of 29 sen/share has been proposed, bringing the 9MFY19 dividends to 42 sen/share in line with our estimate.

• HLFG’s consolidated CET1 ratio, Tier 1 and total capital capital of 9.83%, 10.93% and 13.1% remained above the regulatory requirements of 7.0%, 8.5% and 10.5% respectively for 2019.

Source: AmInvest Research - 29 May 2019