KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• HLB earnings boosted by PPOP growth

• HLAH was dragged by lower revenue and lower life fund surplus

• HLC saw higher contribution from asset management

• No change to FY20 and FY21 earnings forecast

• Maintain NEUTRAL with revised TP of RM17.00 (from RM16.85)

Meeting expectations. HLFG 1QFY20 net profit was within our and consensus' expectations coming in at 23.9% and 24.9% of respective full year estimates. Earnings declined by -3.1%yoy. However, this could be due to the one-off gains at Hong Leong Bank (HLB) level. Normalising for this we estimate net profit grew by +13.0%yoy.

HLB earnings boosted by PPOP growth. Robust PPOP. On normalised basis, HLB’s PPOP grew +8.6%yoy due to by NII expansion of +7.7%yoy and the -1.5%yoy lower OPEX. Its NII was supported by strong loans growth and a recovery in NIM, where it was +14bp qoq and +5bp yoy better. The improvement was due to higher cost fixed deposits getting repriced lower post the OPR cut in May'19. Meanwhile, NOII excluding the one-off gain grew +2.8%yoy contributed by the +20.3%yoy rise in fee income, to RM166m. Gross loans expanded +6.8%yoy to RM138.7b as at 1QFY20. Major drivers were residential properties and domestic business enterprise. These grew +10.2%yoy to RM69.0b and +9.9%yoy to RM39.9b respectively. In terms of business enterprise segment, the key contributors were SME and community SME banking as it expanded +8.9%yoy to RM21.8b and +37.2%yoy to RM6.2b respectively. For deposits, it grew +3.0%yoy to RM163.5b. However, we were pleased that this was mainly led by CASA which expanded +5.5%yoy to RM41.8b Meanwhile, fixed deposits increased +1.3%yoy to RM90.4b and fell -0.7%qoq. We believe that this had helped the NIM recovered in the quarter. Asset quality remained stable with GIL ratio at 0.81%. It was only a slight uptick from 4QFY19 level coming from its domestic loans book. However, overall asset quality remains healthy.

Insurance division became a drag. Insurance division (HLAH) was a drag to overall Group earnings. Its segmental profits were -36.5%yoy lower. The decrease was mainly due to lower revenue of RM15.9m and lower life fund surplus of RM20.7m. However operating expenses came in lower with management expense ratio was 7.0% in 1QFY20, remaining among the lowest in the industry.

Growth in Investment Banking PBT. Investment Banking recorded PBT growth of 7.9% due to higher contribution from the asset management division.

Source: MIDF Research - 28 Nov 2019