Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with an unchanged fair value of RM17.70/share based on SOP valuation. We tweaked our earnings for FY18/F19F by -1.0%/+0.5% by adjusting our assumptions for credit cost and CI ratio.

• HLFG reported net profit of RM259mil in 4QFY17 which declined 38.2%QoQ, underpinned by a lower contribution from Commercial Banking and Investment Banking divisions coupled with a higher tax expense. The increase in taxes was due to tax deductions claimed under HLA Holding and a subsidiary of Hong Leong Bank which were disallowed by the authority. This had a RM170mil impact on its net profit. NOII rose 12.7%QoQ, attributed mainly to a higher net income from insurance business (+87.8%QoQ) as well as stronger income from Treasury operations and dividends from investments

• 12MFY17 net profit grew 10.9%YoY to RM1.5bil, attributed to higher contribution from all business segments (Commercial Banking, Investment Banking, Insurance). Cumulative earnings were within expectation, making up 91.4% of our and 93.7% of consensus estimates.

• HLFG's 64.4%-owned subsidiary, Hong Leong Bank (HLBB) reported a higher PBT of RM2.75bil (+15.4%YoY) for 12MFY17, driven by an increase in operating income as well as a rise in share of profit from it associate, Bank of Chengdu and Sinchuan Jincheng Consumer Finance JV.

• HLBB's operating income continued to outpace OPEX, resulting in positive JAW of 4.1%. CI ratio for HLBB improved to 44.1% for 12MFY17.

• 12MFY17 saw a higher allowance for loan losses due top rudent credit management and provisioning which led to higher net credit cost of 0.13% for HLBB compared to 0.04% for 12MFY16.

• HLA Holdings, the group's insurance division recorded a higher pre-tax profit of RM337.8mil, a rise of 71.0%YoY, contributed by higher life surplus fundsof RM61.3mil, higher revenue of RM45.2mil and share of profit from associate of RM4.2mil. Gross premiums of Hong Leong Assurance (HLA) grew 8.1%YoY to RM3.01bil in 12MFY17. New business regular premiums (NBRP) grew by a commendable 8.3%YoY, contributing to a growth in new business embedded value of 11.0%YoY.Meanwhile, HLA's management expense ratio remained low at 5.5% for 12MFY17, reflecting its cost efficiency.

Source: AmInvest Research - 25 Aug 2017