Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a higher fair of RM19.40/share (previously: RM17.70/share). This is based on an increase in our SOP valuation after factoring in a higher valuation for Hong Leong Bank (HLBB) by rolling over to FY19 numbers.

• On HLFG's 64.4%-owned subsidiary, Hong Leong Bank's (HLBB), we project its earnings to improve by 6.8% in FY19with a lower provision from its associate, Bank of Chengdu (BOC) and higher net interest income (NII) underpinned by the rise in OPR and loan expansion. BNM has raised the OPR yesterday by 25bps from 3.00% to 3.25% on the grounds that the degree of monetary accommodation be normalised. We now expect another rate hike of 25bps in 2H2018 which will move the OPR back to 3.5%. Based on our assessment, every 25bps increase in interest rate will lift HLBB's net profit by 1.3%.

• Recall in our earlier note, we have already revised our FY18/19 earnings for HLBB higher by 2.0%/2.6% to account for higher contribution from BOC and higher NII. This raised our ROE projection for HLBB in FY18/19 to 9.9%/10.0% from 9.7%/9.7% previously.

• On the group's insurance division, we expect HLA's earnings to improve with its strong focus on raising its non-par/par ratio to 70:30 from 56:44 in FY17. Non-par policies have higher margins compared to par policies. We project HLA's net earned premium to grow by 6.3% in FY18 and 7.0% in FY19. The recent increase in interest rate is expected to provide an uplift to the insurance division's earnings by lowering its provisions for contractual liabilities. Although this would be partially offset by a lower fair value for its securities, the net impact is expected to be positive for the group's insurance earnings.

• Meanwhile, for its Investment Banking division under Hong Leong Capital (HLC), we expect earnings to also improve with its fund management and unit trust business benefitting from the strong equity market performance.

• For housekeeping, we have tweaked our net profit estimates for FY18/FY19/FY20 by -2.3%/0.9%/0.4% after fine-tuning our projections for non-interest income.

Source: AmInvest Research - 26 Jan 2018