Operating income grew strongly by 20% YoY in 1QFY25 contributed by stronger earnings contributions from commercial banking and insurance divisions. Earnings continues to be supported largely by its commercial banking arm, Hong Leong Bank (HLBB) with resilient asset quality. The stock trades at a low FY25 PE of 6.1x and PB of 0.6x. Maintain BUY on Hong Leong Financial Group (HLFG) with a higher TP of RM23.80/share (previously RM23.20/share) based on revised SOP valuation with the valuation for HLBB raised and a neutral 3-star ESG rating.

• 1QFY25 earnings of RM848mil were within expectations, making up 24.8% of our estimate and 25.4% of consensus projection. Earnings grew 14.3% YoY in 1QFY25 led by stronger profit contributions from the commercial banking and insurance divisions. Meanwhile, investment banking division profits were lower YoY. Earnings of Debt Markets and Treasury and Markets declined from delays in completion of mandated deals and lower marked-to-market valuation of hedging instruments due to the volatility in interest rate.
• HLBB, the commercial banking arm reported a higher PBT of 7.7% YoY to RM1.3bil supported by a stronger operating income and higher share of profits from associates. HLBB's loans grew 6.9% YoY with a domestic loan growth of 7.6% YoY outpacing the industry's 5.6% YoY. CI ratio for 1QFY25 improved to 39.1% due to a positive JAW of 2.2% YoY. The banking subsidiary's asset quality remained resilient with a stable GIL ratio of 0.54% and a high loan loss cover of 265.1% if include regulatory reserves. Net credit cost in 1QFY25 was low at 0.02%.
• HLA Holdings' PBT grew 142.3% YoY to RM237mil driven by higher investment income and net insurance service results. The insurance division recorded higher fair value gains for both equities and fixed income. Insurance service results of HLA, the key insurance subsidiary recorded an improved insurance service results with higher CSM released. Growth in gross premium for life insurance and family takaful improved to 4.8% YoY attributed to increase in banca contributions.
• The investment banking division under Hong Leong Capital (HLC's) PBT fell by 20.5% YoY to RM22mil. This was contributed by lower profit contribution from asset management and investment banking which offset the higher earnings of its stock broking business. The asset management's business AUM declined by 17% YoY to RM10.1bil due to redemptions in fixed income and money market funds.

Source: AmInvest Research - 28 Nov 2024