Investment Highlights

• We maintain BUY call on Hong Leong Financial Group (HLFG) with a slightly lower fair value (FV) of RM22.60/share (previously RM22.70/share) based on a lower SOP valuation after adjusting Hong Leong Bank’s (HLBB) FY24F shareholders’ funds slightly lower. Our FV reflects a neutral 3-star ESG rating.

• 9MFY23 core earnings were within expectation, accounting for 75% of our FY23F net profit and 77% of consensus’.

• However, we fine-tune FY23F/24F/25F earnings by -2.2%/ +0.2%/+0.6% by tweaking net interest margin (NIM) and loan growth assumptions.

• HLFG reported a lower net profit of RM712mil (-7.6% QoQ) in 3QFY23, contributed by lower earnings of its commercial banking, Hong Leong Bank (HLBB) and insurance division.

• 9MFY23 underlying earnings came in at RM2.17bil (+13.6%YoY), underpinned by stronger profits from the commercial banking and insurance division while earnings of the investment banking (IB) division fell YoY owing to reduced profits from the stockbroking, IB and asset management business.

• HLBB reported a stronger PAT of RM2.95bil in 9MFY23 contributed by higher total income, lower provisions and improved share of profits from associate.

• HLBB’s loan growth moderated to 7.2% YoY in 3QFY23 (2QFY23: 7.6% YoY) with domestic loans expanding by 6.2% YoY above the industry’s 5% YoY. Meanwhile, overseas loan growth moderated to 22% YoY, supported by the expansion of financing in Singapore, Cambodia, and Vietnam.

• CI ratio of HLBB in 9MFY23 was stable at 37.6%.

• The banking subsidiary’s asset quality remained resilient. GIL ratio inched up to 0.52% while loan loss cover of 196.6% was significantly above the industry’s 95.8%.

• Net credit cost of HLBB improved to 8bps (annualised) in 9MFY23 vs 11bps in 9MFY23.

• For 9MFY23, HLA Holdings recorded a stronger PAT of RM292mil (+11.3% YoY). The improved earnings were driven by higher investment income, marked-to-market revaluation gains on investments coupled with higher operating surplus of subsidiaries.

• The key insurance subsidiary, HLA registered a higher 9MFY23 net profit of RM235mil (+16% YoY). However, gross premiums of HLA declined by 2.5% YoY to RM2.29bil in 9MFY23 while new business regular premiums fell by 12.6% YoY to RM404mil.

• Owing to global economic challenges, we continue to expect consumers to remain cautious in acquiring new life insurance products. Hence, demand for insurance is likely to be still skewed towards smaller ticket-sized protection policies in the near term.

• Elsewhere, growth in gross contribution of its family takaful operating subsidiary, Hong Leong MSIG Takaful (HLMT) eased to 34% YoY. Meanwhile, gross premium growth have improved for overseas general insurance subsidiaries, HL Assurance in Singapore and Hong Leong Insurance (Asia) in Hong Kong. Nevertheless, the contribution to the group from these 2 subsidiaries remains small.

• The investment banking division under Hong Leong Capital (HLC) reported a lower PAT of RM41.8mil (-34.9% YoY) in 9MFY23 attributed to lower earnings contributed by its investment banking (IB), stockbroking and fund management businesses. The stockbroking business was impacted by lower market activity with a decline in trading value while the IB business was affected by a drop in trading income. HLC’s asset management business recorded a decrease in PAT due to lower management fees with redemptions of retail money market funds still persisting after the removal of the tax exemption.

• Moving ahead, IB and stockbroking business remain challenging with the market continuing to be volatile amidst uncertainties in the US Fed rate direction against the backdrop of persistently high inflation rate and debt ceiling impasse as well as the extent of China’s economic recovery.

• HLFG’s consolidated CET1 ratio/tier 1/total capital stayed above the regulatory limits at 11.3%/12.4%/15.3%.

• The stock continues to trade at a low FY24 PE of 7x and PB of 0.7x.

Source: AmInvest Research - 1 Jun 2023