INVESTMENT HIGHLIGHTS

• Within expectations

• Hong Leong Bank Bhd earnings growth was mainly driven from write backs and lower tax

• Insurance division saw lower earnings

• Hong Leong Capital net profit decreased

• No change to forecast

• Maintain NEUTRAL on HLFG with a revised TP of RM16.85 (from RM19.50) based on SOTP valuation

Within expectations. HLFG FY19 net profit came in within expectations. It was 97.6% and 94.7% of ours and consensus’ full year estimates respectively.

Write backs and lower tax driver for HLB earnings. Hong Leong Bank Berhad (HLB) FY19 net profit grew +1.0%yoy supported by write backs and lower tax. There were a net write back of RM58.1m in 2QFY19, while tax were -14.2%yoy lower due to a tax incentive.

However, its PPOP remained under pressure, declining - 5.2%yoy even as OPEX was well contained. This was due to lower income which fell -2.4%yoy. NII declined -2.9%yoy as the result of lowered NIM from higher cost of funding. Meanwhile, NOII was relatively flat, contracting -0.7%yoy due to sharp decrease of - 36.4%yoy to RM396m in trading & investment income.

Gross loans ended the year on a strong note. It grew +6.6%yoy to RM137.6b supported by expansion in most of its segments. Residential mortgages and hire purchase loans grew +9.9%yoy to RM67.4b and +3.5%yoy to RM17.5b respectively. SME loans also robust growth of +6.7%yoy to RM21.5b.

Deposits grew at slower pace as at 4QFY19, expanding +3.6%yoy to RM163.1b as compared to +5.7%yoy to RM163.0b as at 3QFY19. FD grew 3.2%yoy to RM91.1b while CASA grew +1.3%yoy to RM41.7b. We believe that this is positive as the HLB has ample liquidity and do not need to fight for deposits. This should mitigate some of the pressure to NIM.

HLB’s GIL ratio improved -9bp yoy to 0.78%. This was its lowest GIL ratio ever. We opine this is one of the key strength of HLB.

Lower earnings for Insurance division. Insurance division (HLAH) net profit declined -3.3%yoy to RM275.4m. This was due to to lower revenue of RM7.3m, higher operating expenses of RM44.4m and lower share of profit from associated company. However, Hong Leong Assurance saw a net profit increase of +4.5%yoy to RM221.0m. Groos premiums recorded at RM2.8b while new business regular premiums grew +2.0%yoy to RM546m. Its management expense ratio was the lowest in the industry at 6.3%.

Investment Banking business declined. The Investment Banking PBT under Hong Leong Capital (HLC) saw its earnings contracting by -5.1%yoy to RM67.7m. This was mainly due to slowdown in capital and equity markets. However, Hong Leong Asset Management continued to show strong growth. Its asset under management had increase +4%yoy to RM15.8b.

FORECAST

We maintain our FY20 forecast.

VALUATION

We believe the main driver for Group's performance continues to be HLB. Therefore, any weakness in HLB’s performance will have a large impact to the Group’s earnings as we have observed in FY19. We opine that there HLB currently lacks an earnings catalyst. Furthermore, the Group’s other divisions have not able to give significant support. Therefore, we are maintaining our NEUTRAL call. Besides revising our earnings forecast, we are also revising our TP to RM16.85 (from RM19.50) due to our revision of HLB’s valuation. Our TP is based on SOTP valuation.

Source: MIDF Research - 29 Aug 2019