Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with an unhanged fair value of RM22.40/share based on SOP valuation.

• No changes to our earnings estimates for now.

• We expect HLFG’s key subsidiary, Hong Leong Bank (HLBB), to report decent earnings in upcoming 3Q22 results in May 2022. This will be supported by stronger loan growth with an acceleration in working capital loans for commercial business/SMEs, stable NIM and robust earnings of associate Bank of Chengdu.

• As at end-Feb 2022, HLBB’s loans under payment relief assistance plans (PRAP) continued to decline to RM10.0bil vs. RM26.4bil as at 31 Jan 2022. This represented 6.0% of its total loan base. Looking ahead, outstanding PRAP loans are expected to further decrease with the expiration of repayment assistance for certain loans and fewer new applications for financial assistance. Arising from this, the banking subsidiary’s asset quality is anticipated to remain stable with 3Q22’s credit cost staying low. Also, the lower PRAP loans will provide room for write-backs in provisions (management overlays) moving forward.

• Meanwhile, for the insurance division, we expect sales for life insurance to improve in 2H22. This will be supported by stronger consumer sentiment from the reopening of the economy and international borders. Also, the pandemic is likely to raise awareness among individuals to sign up for life policies and buy protection coverage earlier than otherwise they would have.

• Recall in 1H22, the key insurance subsidiary Hong Leong Assurance’s (HLA) gross premiums grew by a modest 3.0% YoY while new business regular premiums (NBRP) declined by 17.8% YoY impacted by Covid-19 restrictions.

• The nationwide lockdown implemented on 1 June 2021 affected life insurance demand in 1Q22. As a result, life insurance sales from the agency channel slowed down in the quarter.

• In 2Q22, sales of life insurance improved compared to 1Q22. 
  Sales from the agency channel increased modestly while that of bancassurance recorded a much stronger growth. Nevertheless, these were still insufficient to offset the softer sales in 1Q22.
• Claims have been stable while the persistency ratio for HLA has been holding up in the higher 80s (FY21: 89.9%).
• Meanwhile, HLA’s agency force has increased by 4.4% to 8,449 (FY21: 8,095).

• HLA stands to benefit modestly from any increase in interest rates. Any change in interest rates will be mildly positive on HLA’s earnings as the release of contractual liabilities will outweigh losses from fair value changes of securities. We understand the average duration for HLA’s bond portfolio is only 6–7 years, lower than the duration of life insurance liabilities. Hence, this will mitigate the risk on the key insurance entity’s fair value losses on investments with interest rates on the uptrend.

• On the earnings other subsidiaries of HLA Holdings, both HL Assurance in Singapore and Hong Leong MSIG Takaful have contributed positively to the group with the latter recording stronger growth in gross contributions. Nevertheless, earnings contributions from these 2 entities remained insignificant. On Hong Leong Insurance (Asia) Limited in Hong Kong, we gather that demand for insurance has been impacted by travel restrictions and quarantines. According to the latest media reports, Hong Kong planned to relax some of its Covid-19 restrictions, lifting bans on flights from 9 countries and reducing quarantine time from 14 to 7 days for residents arriving in the city. We expect the changes to be positive on the demand for insurance ahead.
• In 1H22, the investment banking (IB) division under Hong Leong Capital (HLC) reported a lower PBT of RM58mil (- 45.2% YoY) driven by weaker contributions from investment banking and stockbroking business. Moving forward, IB’s performance is anticipated to improve with the completion of some mandated deals which have been delayed due to the MCO. However, this is likely to be offset by the stockbroking business’s drop in earnings from a decrease in trading volume as retail participation has dwindled compared to the corresponding period in the previous financial year.
• On a comforting note, earnings of HLFG will be driven largely by the profits of HLBB followed by the insurance business led by HLA. Meanwhile, earnings contribution from the IB division is expected to remain modest at less than 5.0%.

• HLFG’s consolidated CET1 ratio, Tier 1 and total capital remained healthy at 11.36%, 12.29% and 15.15% respectively as at end-1H22.

Source: AmInvest Research - 25 Mar 2022