Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with unchanged fair value of RM17.70/share based on SOP valuation. We make no changes to our forecast.

• HLFG reported net profit of RM455mil in 1QFY18 (+17.9%YoY), underpinned by a higher contribution from commercial banking and insurance divisions while its investment banking division’s profit was stable. 1QFY18 earnings were within expectations, making up 25.8% of our and 26.4% of consensus estimates.

• HLFG's 64.4%-owned subsidiary, Hong Leong Bank (HLBB) reported a higher PBT of RM780mil (+15.7%YoY),underpinned by higher net income due to an improved NIM as well as a stronger contribution of profit from its associate in China, Bank of Chengdu (BOC), partially offset by higher OPEX and provisions.

• HLBB's continued to record a positive JAW (4.1%) in 1QFY18. CI ratio for HLBB improved to 43.0% for 1QFY18 vs. 44.8% in 1QFY17.

• 1QFY18 saw a higher allowance for loan losses contributed byhigher collective allowance and lower recoveries. This led to a higher net credit cost of 0.14% in 1QFY18 for HLBB compared to 0.08% for 1QFY17.

• HLA Holdings, the group's insurance division recorded a higher pre-tax profit of RM60.6mil, a rise of 13.1%YoY, contributed by lower actuarial reserves from an increase in interest rate as well as growth in premiums. New business regular premiums of Hong Leong Assurance (HLA) grew 9.2%YoY to RM139.3mil in 1QFY18. HLA continues to focus on improving its non-par/par ratio to increase its earnings. Non-par policies have higher margins compared to par policies. Meanwhile, HLA's management expense ratio remained low at 6.7% for 1QFY18.

• Its investment banking division under Hong Leong Capital (HLC) achieved a marginally lower PBT of RM18.3mil, (-0.2%YoY) in 1QFY18. Earnings of HLC were stable with lower PBT of its investment banking and stock broking (-4.8%YoY) offset by higher profits from fund management and unit trust business (+8.2%YoY).

• On 30 November 2017, HLFG issued RM400mil of additional Tier 1 capital securities to strengthen its capital position.

• HLFG has proposed an interim dividend of 13 sen/share in 1QFY18 similar to 1QFY17.

• We continue to see the group's insurance and investment banking business as undervalued by the market. Any increases in interest rate ahead will be positive on its insurance divisions’ earnings by lowering the contract liabilities.

Source: AmInvest Research - 4 Dec 2017