INVESTMENT HIGHLIGHTS

• Earnings met expectations

• Strong growth from Hong Leong Bank Bhd

• Insurance division and Hong Leong Capital expanded more robustly

• Interim dividend of 13 sen

• No change to forecast

• Maintain NEUTRAL on HLFG with an adjusted TP of RM20.10 (from RM19.00) based on SOTP valuation

Meeting expectations. HLFG 1QFY19 net profit was within our and consensus' expectations coming in at 23.6% and 24.9% of respective full year estimates. All of its business segment contributed to the earnings growth of +11.1%yoy.

HLB earnings boosted by NOII growth. Strong NOII growth was the main contributor to Hong Leong Bank's (HLB) earnings growth. Its NOII grew +35.4%yoy due to RM72m gains on divestment of joint venture, Sichuan Jincheng Consumer Finance Ltd. Co. While, we understand that this divestment gain was one-off, discounting the gains NOII still grew at solid pace of +10.9%yoy to RM325m. This was supported by +9%yoy to RM52m growth in forex franchise.

Meanwhile, net interest income was weakened due to compression in net interest margin (NIM). This was due to the twin effect of deposit competition and deposit repricing following OPR earlier this year. However, management of HLB expect NIM to recover slightly as it had seen the price of ringgit denominated deposits stabilising, with pressure coming from USD denominated deposits.

On the cost side, HLB's operating expenses was well contained as it grew +3.6%yoy due to higher personnel cost. Cost to income ratio improved to 42% as revenue outpaced expense growth.

Gross loans grew +4.0%yoy to RM129.8b which was led by the +8.0%yoy to RM62.6b in residential mortgages. Deposits expanded +4.0%yoy to RM158.8b. Bulk of the growth came from fixed deposits which grew +4.8%yoy to RM89.3b. However, CASA shrank -3.2%yoy to RM39.7b. This could be the impact from the deposit competition.

Insurance division had a strong result. Insurance division (HLAH) had a strong quarter mainly due to Hong Leong Assurance’s (HLA) PBT growing +35.5%yoy to RM82.1m. This was supported by significant progress in growing its Non participating and Investment Link new business premiums. Cost remains efficient as HLA's management expense ratio was 6.4%. We understand that the focus for the insurance segment remains on growing and improving the quality of its premium base and growth across multiple distribution channels.

Investment Banking business recovered. The Investment Banking PBT under Hong Leong Capital (HLC) saw an RM4.3m year-on-year increase in 1QFY19 as it posted a PBT of RM22.7m. Its higher PBT mainly contributed by higher non-interest income. On an individual segment basis, investment banking and stockbroking saw higher PBT by RM0.9m (+6.1%yoy) attributed to higher revenue contribution from its Treasury and Markets division. For its fund management and unit trust management, it posted PBT increase of RM2.4m (>100%yoy) mainly due to higher net contribution from management fee income.

FORECAST

We are maintaining our forecasts.

VALUATION

In our opinion, HLB continues to drive the Group's performance. We expect that HLB will continue to deliver on its earnings potential. However, we note that there may be some drag in terms of its net interest income and the margin compression. We believe that this will be moderated by the insurance division as it plays a supporting role given its commendable growth. Therefore, we are maintaining our NEUTRAL call with an adjusted TP to RM20.10 (from RM19.00) as we roll over HLB's valuation to FY20, which affected our SOTP valuation.

Source: MIDF Research - 29 Nov 2018