Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a higher fair value of RM20.80/share (previously: RM19.40/share) based on an increase in our SOP valuation. We raised our net profit estimates for FY18/19 by 4.0%/0.6% after imputing a higher share of profit estimate from HLBB's associate, Bank of Chengdu (BOC).

• HLFG reported a net profit of RM495mil in 2QFY18 (+8.8%YoY), underpinned by a higher contribution from all divisions, commercial banking, insurance and investment banking. 6MFY18 earnings of RM951mil (+14.6%YoY) were within expectations, making up 53.9% of our and 55.5% of consensus estimates.

• HLFG's 64.4%-owned subsidiary, Hong Leong Bank (HLBB), reported a higher PBT of RM1.78bil (+9.0%YoY), underpinned by higher net income with an improved NIM as well as a stronger contribution of profit from its associate in China, BOC, although partially offset by higher OPEX and provisions.

• HLBB's continued to record a positive JAW (2.6%) in 6MFY18. CI ratio for HLBB improved to 42.5% for 6MFY18 vs. 43.6% in 6MFY17.

• Asset quality of HLBB remained strong with a GIL ratio of 1.0% and a stable net credit cost of 0.09% in 6MFY18.

• HLA Holdings, the group's insurance division, recorded a lower pre-tax profit of RM152.4mil, a decline of 19.4%YoY for 6MFY18. This was due to lower life surplus fund of RM31.9mil and a decline in share of profit from associate company of RM11.6mil.

• HLA's management expense ratio remained low at 5.7% for 6MFY18.

• Its Investment Banking division under Hong Leong Capital (HLC) achieved a lower PBT of RM37.4mil, (- 6.4%YoY) in 6MFY18. This was due to lower profits from its investment banking and stock broking business (- 11.1%YoY) which offset higher earnings from fund management and unit trust business (+26.7%YoY).

• No dividend has been proposed in 2QFY18.

• We expect the group's earnings to improve ahead. The recent increase in interest rates with BNM raising the OPR by 25bp in January 2018 will have a positive impact on the NIM of HLBB as well as earnings of HLA by lowering its provisions for contractual liabilities. Meanwhile, HLA's focus on raising its non-par/par ratio towards 70:30 from 56:44 in FY17 is expected to improve its margins for the insurance business.

Source: AmInvest Research - 27 Feb 2018