KEY INVESTMENT HIGHLIGHTS

• In line with our expectations but above consensus’

• HLB’s earnings were weighed down by higher provisions. But PPOP was steady.

• Slowdown in insurance division

• Strong investment banking performance

• Final dividend of 25sen. FY20 dividend of 38sen

• Tweaking earnings forecast

• Upgrade to TRADING BUY with unchanged TP of RM14.10

Met expectations. HLFG FY20 net profit of RM1.86b was within our expectations but above consensus’. It came at 102% of our full year estimates but was at 109.1% of consensus' full year estimates. FY20 earnings fell -3.2%yoy, dragged by higher provisions at Hong Leong Bank (HLB) and OPR cuts which affected Hong Leong Assurance (HLA).

HLB earnings weighed by higher provisions. HLB’s provisions increased +>100%yoy, dragging net profit lower. This was due to additional credit loss buffers amounting to RM220m built, in order to withstand the expected loan impairments impacted by Covid-19.

However, its PPOP grew +1.6%yoy as income due to stable income. Total income grew +1.1%yoy. Main driver was NOII expansion of +10.4%yoy. This was contributed by treasury income. Meanwhile NII surprisingly was flat as it grew marginally +0.4%yoy. This was a pleasant surprise as we had expected NII to contract.

Gross loans expanded +6.1%yoy to RM145.9b as at 4QFY20. Major drivers were residential properties and SME loans. These grew +8.7%yoy to RM73.3b and +5.3%yoy to RM22.6b respectively.

HLB’s GIL ratio improved as at 4QFY20 as it declined -37bp yoy and - 17bp qoq. However, this could be due to the fact that it was still during the loan moratorium period. We expect that there will be an uptick post loan moratorium.

Deposits grew +6.4%yoy to RM173.5b. This was led by CASA whereby it grew +15.9%yoy to RM48.4b outpacing FD growth of +3.8%yoy to RM94.5b.

Lower results in insurance division. Insurance division (HLAH) segmental PBT fell -22.1%yoy. This was due to lower interest rates which affected actuarial reserving. There was also equity investment portfolio volatility and new regulatory obligations such as the Minimum Allocation Rate.

However, the growth momentum of gross premiums and new business regular premiums (NBRP) remained steady despite Covid-19 impact. Gross premiums increased 1.1% to RM2.8b while NBRP grew 3.6% to RM565.1m.

HLA’s management expense ratio was 6.0% in FY20.

Strong performance of its Investment Banking. Investment Banking recorded improved performance as its PBT grew +24.9%yoy. This was due to strong performance of its stockbroking division, unsurprising given the performance of the stock market. Meanwhile, its asset management business was steady. Asset Management’s AUM increased 4.6%yoy to RM18.3b.

Tweak to earnings forecast. We are tweaking our FY21/FY22 earnings forecast downwards by -5.3%/-6.1% following the tweak we did for HLB.

Valuation and recommendation. While earnings were lower, its results were commendable. 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. Nevertheless, HLB’s performance was steady despite the tough operating environment. Furthermore, its investment banking division performed better than we expected. We believe that its recent share price retracement have overshoot and does not really reflect its fundamentals. Therefore, we believe that there is a trading opportunity. Hence, we are upgrading our call to TRADING BUY (previously NEUTRAL). We maintain our TP of RM14.10. Our TP is based on SOTP valuation.

Source: MIDF Research - 1 Sept 2020