Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with an unchanged fair value (FV) of RM22.10/share based on SOP valuation. Our FV reflects a neutral 3-star ESG rating.

• 1QFY23 core earnings were within expectations, accounting for 24% of our estimate and 24.6% of consensus forecast.

• Hence, we have only fine-tuned our FY23F/24F/25F earnings by -2.7%/-7.3%/+2.0%. This is after tweaking our assumptions for loan growth and net interest margin (NIM).

• HLFG reported a flattish core net profit of RM682mil (-0.7% YoY) in 1QFY23. Stronger earnings of its commercial banking division, Hong Leong Bank (HLBB) were offset by lower profit contribution from the insurance and investment banking divisions.

• HLBB reported a stronger PAT of RM981mil (+14.3% YoY) in 1QFY23, contributed by an improved top line, lower allowance for loan losses and stronger associate contributions.

• HLBB’s loans growth accelerated to 8.8% YoY with a domestic loan expansion of 7.1% YoY, outpacing the industry’s 6.4% YoY.

• CI ratio of HLBB in 1QFY23 improved slightly to 36%, supported by positive JAWs of 2.1% YoY.

• The banking subsidiary’s asset quality remained stable with GIL ratio holding up at 0.49% while loan loss cover of 212% was significantly above the industry’s 115%. Net credit cost of HLBB stayed low at 9bps (annualised) in 1QFY23.

• For 1QFY23, HLA Holdings’ PAT decreased by 40% YoY to RM54.5mil, impacted by revaluation losses on the securities of its subsidiaries coupled with a lower share of profit from associates.

• The key insurance subsidiary, HLA’s profit for 1QFY23 fell by 20.1% YoY to RM55.8mil mainly due to marked-to-market losses on fixed income investments which were held to maturity.

• The gross premium of HLA was flattish at RM726.4mil while new business regular premiums sipped 1.5% YoY to RM127.3mil.

• Consumers are expected to remain cautious in acquiring new life insurance products amid the rise in inflation and global economic slowdown.

• Elsewhere, gross contribution of its family takaful operating subsidiary, Hong Leong MSIG Takaful (HLMT), registered a strong growth of 88% YoY. Its 100%-owned Hong Leong Assurance (Asia) in Hong Kong, which operates a general insurance business, recorded a gross premium growth of 15.4% YoY. Meanwhile, HL Assurance, another fully-owned subsidiary involved in general insurance business in Singapore, chalked up a gross premium growth of 40% YoY.

• The investment banking division under Hong Leong Capital (HLC) recorded a lower PAT of RM16mil (-44% YoY) in 1QFY23, attributed largely to lower earnings contributions from investment banking (IB), stockbroking and fund/unit trust management businesses. The stockbroking business recorded lower trading volumes from a drop in retail participation and foreign trading activities. HLC’s asset management business reported a decrease in PAT of 53.4% YoY, contributed by lower management fees. This was due to the removal of retail tax exemption for nonindividual unit holders, which resulted in redemptions.

• Moving ahead, IB and stockbroking businesses remain challenging with the market continuing to be volatile amid elevated inflation and ongoing geopolitical tensions. Meanwhile, the expected slowdown in the pace of interest rate hikes globally bodes well for earnings to be less impacted by marked-to-market losses of fixed income investments/securities. HLFG’s consolidated CET1 ratio/tier 1/total capital stayed above the regulatory limits at 11.4%/12.6%/15.5%.

• The stock is trading at a low FY23F PE of 8x and P/BV of 0.8x. We continue to like HLFG as a cheaper entry for exposure to HLBB, which has delivered resilient earnings and strong asset quality.

Source: AmInvest Research - 30 Nov 2022