Investment Highlights

• We maintain BUY on Hong Leong Financial Group (HLFG) with an unchanged fair value (FV) of RM20.80/share based on SOP valuation. Our FV reflects a neutral 3-star ESG rating.

• We made no changes to our earnings forecast as 1Q24 core earnings RM742mil were within expectations, making up 24.8% of our full-year estimate and 25.6% of consensus projection.

• 1Q24 net profit grew 10.8% YoY, contributed by stronger earnings from all divisions (commercial banking, insurance and investment banking).

• HLBB, the commercial banking arm, reported higher PBT of RM3.8bil (+4.7%YoY) in 1Q24 supported by higher share of profits from associates and net writeback in loan impairment allowances of RM51mil.

• HLBB’s loans grew 7.2% YoY with domestic loan growth of 7.5% YoY outpacing the industry’s 4.3% YoY. Meanwhile, growth in overseas loans moderated to 4.4% YoY supported largely by expansion in Singapore’s loan book. The focus ahead will be on growing SMEs, commercial and overseas operations’ loans.

• 1Q24 CI ratio of HLBB rose to 39.9% vs. 1Q23’s 36%. This was largely attributed to higher operating expenses (opex) from an increase in personnel costs.

• The banking subsidiary’s asset quality remained resilient with a stable GIL ratio 0.57% while loan loss cover of 165% continued to stay above the industry’s 91%.

• Net credit cost of HLBB improved to -11bps in 1Q24 vs. 9bps in 1Q23.

• 1Q24 HLA Holdings’ PBT grew 84.9% YoY. The improved earnings were driven by higher investment income from marked-to-market revaluation gains on investments coupled with a higher share of profit from associates.

• The key insurance subsidiary, HLA’s PBT in 1Q24 increased 47.3% YoY to RM79.3mil. Gross premiums of HLA were subdued while new business regular premiums fell 6.3% YoY as consumers remained cautious in committing to longer term insurance policies coupled with the end of the government’s initiative to provide “perlindungan tenang” vouchers for purchasing insurance protection.

• Elsewhere, growth in gross contribution of its family takaful operating subsidiary, Hong Leong MSIG Takaful (HLMT) fell 14.9% YoY as a result of lower contributions from bancatakaful channels. Meanwhile, gross premium of the overseas general insurance subsidiaries, HL Assurance in Singapore and Hong Leong Insurance (Asia) in Hong Kong, grew double digits YoY.

• The investment banking division under Hong Leong Capital’s (HLC) PBT grew 31.8% YoY to RM27.4mil, attributed to higher non-interest income.

• By segments, earnings of investment banking and stockbroking increased 4.8% YoY in 1Q24 while PBT of its fund and unit trust management decreased 19.6% YoY due to higher operating expenses.

• HLFG’s consolidated CET1 ratio/tier 1/total capital stayed above regulatory limits at 10.9%/12%/14.5%.

• The stock continues to trade at a low FY24 PE of 6.2x and PB of 0.6x.

Source: AmInvest Research - 1 Dec 2023