Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value of RM21.50/share (previously: RM21.60/share) based on a lower our SOP valuation. This is after imputing a lower FY19 shareholders’ funds estimate for its subsidiary, Hong Leong Bank (HLBB). We tweaked our net profit projection for FY19/20 marginally by 1.7%/0.1% after fine-tuning our total income, operating expenses and credit cost estimates.

• HLFG reported net profit of RM454mil (-9.6%QoQ) in 4QFY18. For the full FY18, the group delivered a stronger net profit of RM1.9bil (+26.6%YoY) underpinned by a higher contribution from commercial banking and insurance businesses, though partially offset by a lower profit contribution from investment banking. 12MFY18 earnings were within expectations, making up 100.6% of our and 103.9% of consensus estimates.

• HLFG's 64.4%-owned subsidiary, HLBB reported a higher PBT of RM3.25bil (+18.1%YoY), underpinned by higher net interest and non-interest income, lower provisions for loan impairment and an increase in share of profit from its associate, Bank of Chengdu.

• HLBB's continued to record a positive JAW (3.6%) for 12MFY18. CI ratio for HLBB improved to 42.6% for 12MFY18 vs. 44.1% in 12MFY17.

• Asset quality of HLBB remained strong with a lower GIL ratio of 0.87% than the industry’s 1.6%. HLBB’s recorded a low net credit cost of 0.06% in 12MFY18.

• HLA Holdings, the group's insurance division achieved a higher pre-tax profit of RM348mil (+3.0%YoY) for 12MFY18. This was contributed by a higher revenue of RM24.7mil, a decline in operating expenses of RM1.4mil and an increase in life fund surplus of RM0.4mil, partially offset by lower share of profits from associates and higher impairment losses on securities. HLA's management expense ratio remained low at 5.9%. It continued to focus on growing non-participating and investment linked policies which generally have higher embedded value margins than ordinary life policies.

• Its investment banking division under Hong Leong Capital (HLC) achieved a lower PBT of RM79mil, (- 6.5%YoY) in 12MFY18. This was due to lower profits from its investment banking and stockbroking business (- 9.1%YoY) while profit from fund management and unit trust business climbed 53.1%YoY.

• Moving forward, despite the widely expected slower economic growth, we continue to expect a decent profit growth from its commercial banking and insurance businesses but a more challenging environment for the group’s investment banking due to the volatile market.

Source: AmInvest Research - 29 Aug 2018