INVESTMENT HIGHLIGHTS

• Earnings met expectations

• Hong Leong Bank Bhd remains a key driver

• Insurance division grew robustly despite one-off adjustment

• Hong Leong Capital dragged by investment banking

• Full year dividend of 40 sen

• No change to forecast

• Maintain NEUTRAL on HLFG with an adjusted TP of RM19.00 (from RM18.70) based on SOTP valuation

HLFG FY18 earnings met expectations. HLFG full year net profit met expectations as it came in at 101.4% and 101.9% of ours and consensus' estimates respectively. The main driver for the +26.6%yoy earnings growth was the strong performance of its commercial banking arm (i.e. Hong Leong Bank).

Strong HLB earnings growth due to PPOP growth. NOII and Islamic Banking income were the main contributors for HLB’s income growth. These income segments went up by +10.3%yoy and +17.4%yoy to RM1.8b and RM646m respectively. The strong growth in NOII was due to trading and investment. Meanwhile, NII expansion was decent at +1.4%yoy to RM2.9b. However, there was pressure to net interest margins in 4QFY18 which led to 4QFY18 NII to drop by - 5.3%yoy.

On the cost side, HLB's OPEX was well contained as it grew +2.6%yoy. Personnel cost fell on lower headcount. Main cost item continue to be IT expenses where it rose +11.2%yoy to RM164.3m as the Group continue to investment in digitisation.

HLB's gross loans growth was decent at +3.1%yoy. The main driver was residential properties loans which grew +7.9%yoy to RM61.4b. However, deposits for HLB were disappointing as it grew by only +1.4%yoy to RM157.4b. Nevertheless, we noted there was good CASA momentum.

Insurance division growth curtailed by one-off adjustment. Insurance division (HLAH) PBT grew +3.0%yoy to RM348.0m. This was mainly due to Hong Leong Assurance’s (HLA) +8.4%yoy PBT expansion to RM265.5m. However, we understand that there was a one-off adjustment of RM58.5m. Discounting this adjustment, HLA and HLAH PBT would have grown +31.1%yoy and +20.3%yoy respectively. Meanwhile, HLA’s gross premiums came in at RM2.95b, down from RM3.01b a year ago. New business regular premiums also went down from RM586m to RM537.5m. On cost efficiency, HLA’s management expense ratio was 5.9%.

Investment Banking business under Hong Leong Cap (HLC) declined due to market conditions. The Investment Banking PBT under Hong Leong Cap (HLC) fell -6.4%yoy to RM78.6m. This was due to subdued market conditions. The drag came from investment banking as PBT fell -25%yoy to RM29.3m. However, this was moderated by stockbroking and asset management where PBT grew +11%yoy and +53%yoy to RM32.6m and RM12.4m respectively.

FORECAST

We are maintaining our forecasts.

VALUATION

In our opinion, the Group continues to be driven by the performance of HLB, which we expect will continue to deliver on its earnings potential. In addition, we believe that the insurance division will play a supporting role given its commendable growth. However, we believe that all the positive have been fully priced in. Therefore, we are maintaining our NEUTRAL call with unchanged TP to RM19.00.

Source: MIDF Research - 29 Aug 2018