Investment Highlights

• We maintain BUY on Hong Leong Financial Group (HLFG) with a revised fair value to RM20.60/share (previously RM19.00/share) based on higher derived SOP valuation. We tweak our FY21/22/23 earnings by -2.9%/+0.5%/+1.2% as we fine-tune our NIM and credit cost assumptions. HLFG remains a cheaper entry for gaining exposure to Hong Leong Bank (HLBB).

• HLFG reported lower net profit of RM528mil (-10.1% QoQ) in 2Q21 due to its key subsidiary HLBB building further preemptive provisions. QoQ, earnings of its investment banking division were stable while the insurance division reported higher profits.

• For 6M21, earnings of RM1.1bil grew 12.2% YoY with higher profit contribution from all divisions (commercial + share of results from associates, investment banking and insurance). Cumulative earnings were within our expectations, accounting for 54.3% and 54.7% of our and consensus estimate respectively.

• Its key subsidiary, HLBB, posted a stable PBT of RM1.71bil (+0.1% YoY) for 6M21. The stronger top line of HLBB was partially offset by higher pre-emptive provisions while its share of profit from associates continued to be robust.

• HLBB’s asset quality remained sound with GIL ratio of 0.54% against the industry’s 1.6% while loan loss cover including regulatory reserves was high at 264.0%. Credit cost of HLBB stood at 0.46% (annualized) in 6M21.

• HLA, the key insurance subsidiary reported a higher profit after tax of RM207mil (+96.1% YoY). Stripping out one-off prior year tax adjustments, profit after tax rose by 54.0% YoY. The increase in normalised profit rose was underpinned by higher premiums and unreliased gains on revaluation of equities. In 6M21, HLA’s gross premiums and new business regular premiums (NBRP) expanded by 13.2% YoY and 37.7% YoY respectively. Life surplus funds were higher by RM38mil. Meanwhile, Hong Leong MSIG Takaful showed improvement in gross contributions YoY.

Source: AmInvest Research - 1 Mar 2021