KEY INVESTMENT HIGHLIGHTS

• Results met with expectations

• HLB’s earnings dragged by lower income and higher provisions

• Slowdown in insurance division

• Small growth in investment banking

• No change to earnings forecast

• Maintain NEUTRAL with revised TP of RM14.10 (from RM17.00)

Met expectations. HLFG 9MFY20 net profit of RM1.33b met our expectations but below consensus’. It came at 73.1% of our revised full year estimates while at 69.4% of consensus' full year estimates. The earnings was weighed down by Hong Leong Bank (HLB) and insurance segment’s performance.

HLB earnings affected by lower income and higher provisions. HLB’s PPOP in 3QFY20 PPOP fell -7.2%yoy, moderting its 9MFY20 PPOP to grow +4.9%yoy. NII in 3QFY20 came in lower by -2.1%yoy due to NIM compression of -16bp yoy following from the OPR cuts in the quarter. In terms of provisions, it increased in 3QFY20 with credit cost going up +34bp yoy. This was due to ECL buffers of RM65m set aside to take into account the effect of Covid-19 pandemic and the movement control order (MCO).

However, gross loans expanded strongly, by +6.6%yoy to RM142.4b as at 3QFY20. Major drivers were residential properties, domestic business enterprise and surprisingly in Singapore. These grew +8.9%yoy to RM71.8b, +4.6%yoy to RM40.5b and +14.2%yoy to RM5.6b respectively. In terms of business enterprise segment, the key contributors were SME and community SME banking as it expanded +1.7%yoy to RM21.2b and +33.5%yoy to RM7.1b respectively.

HLB’s GIL ratio saw another uptick on a sequential quarter basis. GIL ratio went up +14bp qoq to 0.98%. However, we consider this to be still very manageable and the management expect it to normalize in 4QFY20. Deposits grew +3.0%yoy to RM167.9b. CASA saw good growth with +11.8%yoy to RM44.3b outpacing FD growth of +3.9%yoy to RM95.6b. This could be due to depositors ensuring sufficient cashflows.

Slowdown in insurance division. Insurance division (HLAH) segmental profits fell -86.1%yoy. This was due to lower interest rates and a few one-offs impact. HLA’s management expense ratio was 6.3% in 9MFY20, remaining among the lowest in the industry.

Growth in Investment Banking results. Investment Banking recorded improved performance as its PBT grew +3.8%yoy. This was mainly due to higher contribution from the asset management, investment banking and stockbroking divisions.

Source: MIDF Research - 1 Jun 2020