INVESTMENT HIGHLIGHTS

• In line with expectations

• Hong Leong Bank Bhd earnings growth was mainly from write backs

• Insurance division saw lower earnings

• No change to forecast

• Maintain NEUTRAL on HLFG with an unchanged TP of RM20.10 based on SOTP valuation

Meeting expectations. HLFG 1HFY19 net profit was within our and consensus' expectations coming in at 46.0% and 48.7% of respective full year estimates. Earnings slowed in 2QFY19, contracting by - 2.8%yoy resulting in 1HFY19 earnings growth of +3.9%yoy.

HLB earnings came from write backs in 2QFY19. Hong Leong Bank's (HLB) PBT grew +3.8%yoy to RM1.67b. Main contributor were write backs in loan provisions in 2QFY19. GIL ratio improved -17bps yoy to 0.8% as at 2QFY19.

However, PPOP under pressure as it fell -2.1%yoy on higher OPEX and marginal decline in income. OPEX rose +1.3%yoy mostly contributed by IT spending.

As for NII in 1HFY19, it contracted -3.7%yoy as pressure on NIM as it compressed by -15bps yoy for 1HFY19. The lower NIM was due to deposits competition which led to higher COF. Meanwhile deposits growth was led by FD. Deposits expanded +4.7%yoy to RM162.6b with FD increasing +3.5%yoy to RM92.6b. CASA declined -2.4%yoy to RM40.3b due to withdrawal of some corporate accounts.

Nevertheless, NOII moderated NII weakness, but from one-off gains. NOII grew +8.0%yoy moderated the NII contraction. However, we noted that the growth in NOII was due to a one-off RM90m gains that come from a divestment in a JV.

Meanwhile, gross loans as at 2QFY19 grew at a faster pace, with +4.8%yoy to RM131.6b vs. +4.0%yoy posted as at 1QFY19. It was led by the +8.8%yoy to RM64b in residential mortgages. Meanwhile, SME loans grew +6.8%yoy to RM21.0b.

Insurance division earnings declined. Insurance division (HLAH) earnings posted PBT decline of -7.6%yoy to RM140.9m. This was due to lower revenue and higher OPEX. However, higher share of profit from an associate, higher life fund surplus and lower provisions on securities moderated this impact.

Source: MIDF Research - 27 Feb 2019