Investment Highlights

• We maintain BUY on Hong Leong Financial Group (HLFG) with a revised fair value to RM17.20/share (previously RM16.00/share) based on a higher derived SOP valuation. We fine-tune our net profit estimate for FY21/22 by +19.0%/+14.4% by raising our non-interest income (NOII) estimates and NIM assumptions. HLFG remains a cheaper entry for gaining exposure to Hong Leong Bank (HLBB).

• HLFG reported an improved core net profit of RM668mil (+96.8% QoQ) in 4Q20 with stronger contribution from all divisions (commercial, investment banking and the insurance division) after stripping out the modification loss of Hong Leong Bank (HLBB) amounting to RM142.5mil. HLA Holdings Group (HLAH) recorded a higher PBT QoQ to RM173.1mil on an improved revenue of RM76.4mil largely from unrealized gains on revaluation of equity, lower opex, higher life surplus fund of RM118.9mil and share of profit from associates. Meanwhile, profit contribution from its Investment banking (IB) business under Hong Leong Capital (HLC) rose QoQ due to improved earnings from fund management, unit trust and stockbroking.

• Core earnings for 12M20 grew 10.9% YoY to RM2bil after excluding the modification loss and the one-off gains of 90mil from its subsidiary, HLBB’s divestment of stake in a JV entity (Sichuan Jincheng Consumer Finance Company Ltd) in 12M19. Profit contribution from IB rose while its insurance business recorded lower PBT for 12M20.

• Cumulative earnings were above our expectations, accounting for 110.4% and 117.4% of our and consensus estimate respectively.

• Its key subsidiary, HLBB, reported a core PBT of RM3.1bil (+2.0% YoY) for 12M20. This was on the back of lower opex and higher NII after excluding the modification loss. Nevertheless, provisions trended higher in 4Q20 resulting in 12M20 net credit cost of 22bps, which included higher allowances of RM220mil with the increase in ECL buffers and forward-looking adjustments (RM81mil). HLBB’s domestic loan growth remained robust at 5.9% YoY and continued to outpace the industry’s 4.1% YoY growth. Meanwhile, its underlying NIM was flat at 1.96% despite the consecutive rate cuts of 100bp in 1HCY20.
   
• The asset quality of HLBB continues to be healthy with a low GIL ratio of 0.61% vs. the industry’s 1.5%.
   
• On the insurance business, HLAH recorded a lower net profit of RM227.6mil (-17.4% YoY) in 12M20 as it was impacted by lower revenue from unrealized loss on revaluation of equities and life fund surplus.

• The net profit of Hong Leong Assurance (HLA), the key insurance operating subsidiary, fell by 36.1% YoY to RM141.2mil for 12M20. This was due to lower interest rates affecting the actuarial reserving for contractual liabilities. Also, the minimum allocation rate (MAR) regulation implemented on 1 July 2019 requiring higher allocation of 60.0% from life insurance premiums to reserves compared to 45.0% previously in the first 2 years of the policy impacted the profitability for the new business premiums. We understand that the impact of MAR on the insurance group’s earnings was RM40mil in FY20 and is likely to be slightly higher moving into FY21. Additionally, the equity investment portfolio value for its insurance business was impacted by market volatility.

• HLA’s gross premium growth was flat at 1.1% YoY to RM2.8bil in 12M20. New business regular premium (NBRP) grew 3.6% YoY to RM565.1mil while management expense ratio remained low at 6.0% for 12M20. The persistency ratio improved to 87.1% in FY20 (FY19: 85.8%), and the group targets to maintain the ratio at 85.0% in FY21.

• HLA is staying focused on driving the growth of embedded value (EV) for its insurance business. This will be through changing the product mix by increasing the non-par and investment linked/par ratio. In general, non-par/investment-linked policies have higher EV margins than ordinary life policies. The percentage of non-par and investment-linked to par ratio stood at 97:3 as at the end of FY20 with management intending to maintain it above 80.0%. Market share for ordinary life new business regular premium (NBRP) slipped slightly to 8th position while that for investment-linked life NBRP rose to 3rd position.

• HLA’s FY20 embedded value (EV) climbed 3.0% YoY to RM2.52bil while its new business embedded value (NBEV) fell 26.2% YoY to RM147.8mil in 12M20 due to changes in assumptions to reflect the low interest rate environment.

• The outlook for premium growth remains challenging due to the Covid-19 outbreak. The industry recorded a decline in total premiums by 12.6% in 6MCY20.

• Its investment banking division under Hong Leong Capital (HLC) reported a higher PBT of RM95.8mil (+24.9% YoY) for 12M20. The improved earnings were driven by higher contribution from the fund management, unit trust and stockbroking business.

• A final dividend of 25 sen/share has been proposed. This brings the total dividends for FY20 to 38 sen/share, in line with our expectation.

• HLFG’s consolidated CET1 ratio, Tier 1 and Total capital rose to 11.2%, 12.2% and 15.2% in 4Q20 compared to 10.8%, 11.7% and 14.8% respectively in 3Q20. The ratios stayed above the regulatory requirements of 7.0%, 8.5% and 10.5% respectively.

Source: AmInvest Research - 1 Sept 2020