Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value (FV) of RM22.30/share (previously RM22.60/share) based on a lower SOP valuation. Our FV reflects a neutral 3-star ESG rating.

• 12M23 core earnings were within expectation, coming in 0.7% below both our and consensus estimate. However, we lower FY24F/25F earnings estimates by 1.5%/6.2% to factor in a lower net interest margin (NIM) assumption.

• HLFG reported a lower net profit of RM626mil (-12.1% QoQ) in 4Q23, contributed by a decline in non-interest income (NOII) and higher operating expenses (OPEX).

• 12M23 underlying earnings of RM2.79bil rose by 5.1% YoY underpinned by stronger profit 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 core PAT of RM3.8bil (+6.1%YoY) in 12M23, contributed by a higher NOII, lower provisions and stronger share of profit from associate.

• HLBB’s loan growth picked up pace to 8% YoY in 4Q23 (3Q23: 7.2% YoY) with domestic loans expanding by 7.2% YoY, above the industry’s 4.4% YoY. Meanwhile, overseas loan growth moderated to 19% YoY, supported by the expansion of financing in Singapore, Cambodia and Vietnam.

• CI Ratio of HLBB in 12M23 Rose to 39.3% as Growth in OPEX Outpaced Total Income.

• The banking subsidiary’s asset quality remained resilient. GIL ratio inched up to 0.57% while loan loss cover of 169% remained well above the industry’s 91.8%.

• Net Credit Cost of HLBB Improved to 6bps in 12M23 Vs. 10bps in 12M22.

• For 12M23, HLA Holdings recorded a stronger PAT of RM366mil (+8.1% YoY). The improved earnings were driven by higher investment income from marked-to-market revaluation gains on investments, partially offset by a lower operating surplus of its subsidiaries.

• The key insurance subsidiary, HLA’s net profit after tax in 12M23 registered an increase of 10.6% YoY to RM284mil. Gross premiums of HLA declined by 2.2% YoY while new business regular premiums fell by 17.3% YoY to RM530mil as consumers remained cautious in committing to longer term insurance policies.

• We understand that the group plans to shift its focus towards smaller size protection products which carry higher margins. 12M23 saw an increase in the protection and savings premium mix to 38:62 from 24:76 in the previous financial year. The bulk of HLA’s premiums (79%) are from investment-linked products. HLA’s new business are mainly IL and non-par products. The ratio of IL & non-par over the par products stood at 95:5 as at end-4Q23. The ratio of regular over single premium of HLA was 93:7.

• HLA’s embedded value increased by 16% YoY to RM3.78bil while its new business embedded value (NBEV) decreased by 11% YoY to RM178mil. NBEV margin slipped slightly to 35% in 12M23 vs. 35.7% in 12M22.

• Elsewhere, growth in gross contribution of its family takaful operating subsidiary, Hong Leong MSIG Takaful Berhad (HLMT) declined by 20% YoY. Meanwhile, the gross premium growth of the overseas general insurance subsidiaries, HL Assurance in Singapore and Hong Leong Insurance (Asia) in Hong Kong have improved in 12M23. Nevertheless, the contribution to the group from these 2 subsidiaries remain insignificant. Profit contribution from its associate in the general insurance business, MSIG slipped by 13% YoY due to higher claims from the motor class of business.

• The investment banking division under Hong Leong Capital (HLC) reported a lower PAT of RM50mil (-50% YoY) in 12M23, attributed to lower earnings from its investment banking (IB), stockbroking and fund management businesses. The stockbroking business was impacted by lower trading volume on Bursa Malaysia while the IB business was affected by delays in mandated deals. HLC’s asset management business recorded a decrease in PAT due to a lower AUM of RM11.6bil in 12M23 (12M22: RM16.7bi) with the withdrawal of money market funds after the tax exemption was withdrawn.

• Moving ahead, IB and stockbroking business remain challenging with the market continuing to be volatile amidst uncertainties in the Fed rate decision and the slower economic recovery in China. HLFG’s consolidated CET1 ratio/tier 1/total capital stayed above the regulatory limits at 11%/12.1%/14.6%.

• The Stock Continues to Trade at An Attractive FY24F PE of 7x and P/BV of 0.7x.

Source: AmInvest Research - 1 Sept 2023