Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a higher fair value of RM21.60/share (previously: RM20.80/share) based on an increase in our SOP valuation. We tweaked our net profit estimates for FY18/19/20 by 5.8%/3.7%/4.0% after imputing lower provisions and revised our estimates lower for minority interest (MI).

• HLFG reported a net profit of RM503mil in 3QFY18 (+1.5%QoQ: +20.0%YoY), underpinned by a higher contribution from commercial banking and insurance divisions while earnings from investment banking was lower due to weaker capital market activities. 9MFY18 earnings of RM1.45bil (+16.4%YoY) were slightly ahead of expectations, making up 81.1% of our and 82.0% of consensus estimates.

• HLFG's 64.4%-owned subsidiary, Hong Leong Bank (HLBB) reported a higher PBT of RM2.5bil (+19.4%YoY), underpinned by higher total income, well managed OPEX growth, stronger contribution of profit from its associate in China, BOC and lower provisions partially offset by higher taxes.

• HLBB's continued to record a positive JAW in 9MFY18. CI ratio for HLBB improved to 42.3% for 9MFY18 vs. 43.9% in 9MFY17.

• Asset quality of HLBB remained strong with a GIL ratio of 0.84% and a stable net credit cost of 0.07% in 9MFY18.

• HLA Holdings, the group's insurance division recorded a pre-tax profit of RM247.9mil, an increase of 1.1%YoY for 9MFY18. HLA's management expense ratio remained low at 5.9% for 9MFY18.

• Its investment banking division under Hong Leong Capital (HLC) achieved a lower higher PBT of RM58mil (- 11.6%YoY) for 9MFY18. This was due to lower profit contribution from its investment banking and stockbroking business (-15.6%YoY) partially offset by higher earnings of its fund management and unit trust business at PBT level (+41.5%YoY) arising from an increase in management fee income.

• A 2nd interim dividend of 27 sen/share has been proposed in 3QFY18. This brings the total dividends to 40 sen for 9MFY18 above our expectation of 38 sen/share for FY18.

• Any potential interest rate increase ahead will have a positive impact on the earnings of HLA by lowering its provisions for contractual liabilities. Meanwhile, HLA's continued focus in growing non-participating policies and investment link products is expected to improve its underwriting margins.

Source: AmInvest Research - 31 May 2018