INVESTMENT HIGHLIGHTS

• Did not meet expectations

• Hong Leong Bank Bhd earnings growth was mainly from write backs but operating profit declined

• Insurance division saw lower earnings

• Interim dividend 29sen

• Revising FY19 and FY20 forecast by -8.3% and -9.4%

• Maintain NEUTRAL on HLFG with an revised TP of RM19.50 (from RM20.10) based on SOTP valuation

Below expectations. HLFG 9MFY19 net profit came in below our expectations at 67.7% of our full year estimate. It was only within consensus’ estimates at 71.6%. The variance was due to our underestimation of the weakness the income from its insurance divisions.

HLB earnings continue to be propped by writebacks. Hong Leong Bank's (HLB) PBT in 9MFY19 was rather flattish with decline of -0.9%yoy to RM2.03b. Main contributor for the decline was the weakness in income which was moderated by write backs in loan provisions. Income fell -2.9%yoy dragged by both lower NII and NOII. HLB's NII fell -2.8%yoy due mainly to NIM compression of -14bp yoy. The NIM compression stemmed from deposits competition which led to higher COF. As for NOII, it fell -3.0%yoy. The contraction was due to lower trading & investment gains which fell -42.8%yoy to RM259m. Gross loans as at 3QFY19 trended higher, expanding +6.5%yoy to RM133.6b , vs. +4.8%yoy and +4.0%yoy as at 2QFY19 and 1QFY19 respectively. It was driven by the +9.4%yoy to RM66b in residential mortgages and +8.1%yoy to RM20.9b in SME loans. Meanwhile, deposits grew +5.7%yoy to RM163.0b. It was not surprising that NIM came under pressure as the growth was led by FD. As at 3QFY19, FD grew +5.1%yoy to RM92.0b whereas CASA declined -3.6%yoy to RM39.6b.

Insurance division earnings declined. Insurance division (HLAH) earnings posted PBT decline of -7.8%yoy to RM186.5m. This was due to lower premiums and weak market sentiments. Share of profit from associated company also came in lower. This was mitigated by higher revenue, lower provisions on financial investments and higher life fund surplus. In addition, its management expense ratio was 6.3% in 9MFY19, which is amongst the lowest in the industry.

Source: MIDF Research - 29 May 2019