KEY INVESTMENT HIGHLIGHTS

• Results were within expectations

• HLB earnings boosted by solid PPOP growth

• HLAH was dragged by lower interest rates and a number of one-offs

• HLC saw higher contribution from asset management

• Revising FY20 and FY21 earnings forecast downwards

• Maintain NEUTRAL with revised TP of RM16.30 (from RM17.00)

Meeting expectations. HLFG 1HFY20 net profit was within our and consensus' expectations coming in at 48.3% and 50.5% of respective full year estimates. PATAMI grew marginally by +0.6%yoy but this was due to the one-off gains at Hong Leong Bank (HLB) level. Normalising for this we estimate net profit grew by +10.7%yoy.

HLB earnings supported by solid PPOP growth. On normalized basis, HLB's PPOP expanded strongly by +10.9%yoy as NII and NOII grew +4.5%yoy and +12.6%yoy respectively. Moreover HLB posted positive JAWS of +5.4%. NII growth was attributed to continued recovery in NIM in 2QFY20 where it increased +1bp qoq, and solid loans growth momentum. HLB had shown good income resilience in light of the OPR cut last year. We also expect the same trend to continue with the recent OPR cut in Jan-20. However, should there be another OPR cut, we believe that its NIM will be under pressure. Gross loans expanded +7.3%yoy to RM141.3b as at 2QFY20. Major drivers were residential properties and domestic business enterprise despite the cautious business sentiment. These grew +9.8%yoy to RM70.6b and +7.4%yoy to RM42.2b respectively. Deposits grew +2.7%yoy to RM167.0b. Overall, CASA saw good growth with +7.3%yoy to RM43.2b outpacing FD growth of +5.4%yoy to RM97.6b. HLB's asset quality had a slight uptick of +3bp qoq to 0.84%. However, we consider this to be very stable and below the industry’s GIL ratio. The increase came at its overseas loans book with 2 isolated cases in Singapore of circa RM77m.

Insurance division became a drag. Insurance division (HLAH) was a drag to overall Group earnings. Its segmental profits were -22.3%yoy lower. It was impacted by lower interest rates and a number of one-offs including the new Minimum Allocation Rate rules implemented effective 1 July 2019. However, HLA continues to make good progress in creating higher New Business Embedded Value through the growth of its Non Participating and Investment Link new business premiums. Meanwhile, its management expense ratio was 6.0% in 1HFY20.

Growth in Investment Banking PBT. Investment Banking recorded PBT growth of 26.7% due to higher contribution from the asset management division. Its net profit grew 71%yoy to RM13.8m while average AUM increased by +8.7%yoy to RM19.1b.

Source: MIDF Research - 27 Feb 2020