Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value to RM16.50/share (previously RM16.60/share) based on a lower derived SOP valuation. We fine-tune our net profit estimate for FY20/21 by -3.4%/-3.3 by lowering our non-interest income (NOII) estimates and factoring in a higher credit cost of 0.15% for FY20. HLFG remains a cheaper entry for gaining exposure to Hong Leong Bank (HLBB).

• HLFG reported a core net profit of RM339mil (-32.6% QoQ) in 3QFY20 with a lower contribution from commercial and investment banking, and the insurance division. Core earnings for 9MFY20 slipped 2.1% YoY to RM1.33bil after excluding the one-off gain of RM90mil from its subsidiary, HLBB’s divestment of stake in a JV entity (Sichuan Jincheng Consumer Finance Company Ltd) in 9MFY19.

• Cumulative earnings were slightly below expectations, accounting for 69.0% of both our and consensus estimates.

• Its key subsidiary, HLBB reported a core PBT of RM2.34bil (-0.9% YoY) for 9MFY20. This was on the back of higher total income offset by higher operating expenses and provisions, which included a preemptive provisioning of RM65mil in 3QFY20 for the potential impact of Covid-19 (9MFY20 net credit cost: 13bps). HLBB’s domestic loan growth remained robust at 5.9% YoY which outpaced the industry’s 4.0% YoY growth. Meanwhile, its YTD NIM was only compressed by 1bps YoY to 1.97% despite two OPR cuts in 3Q20 (25bps each on Jan and Mar 2020).

• Asset quality of HLBB continues to be healthy with a low GIL ratio of 0.98% vs. the industry’s 1.6%.

• On the insurance business, HLA Holdings Group (HLAH) recorded a lower PBT of RM83.3mil (-62.9% YoY) in 9M20. Revenue fell to RM69.9mil as a result of unrealised losses from the revaluation of equities of RM40.9mil which could turn around the next quarter with the improvement in the equity market performance. Also, HLAH’s earnings were impacted by a lower life fund surplus of RM92.5mil.

• Hong Leong Assurance (HLA), the key insurance operating subsidiary, recorded a lower net profit of RM74.7mil for 9M20.

Source: AmInvest Research - 1 Jun 2020