Hong Leong Financial Group Bhd
(May 29, RM18.90)
Maintain neutral with a lower target price (TP) of RM19.50: Hong Leong Financial Group Bhd (HLFG) cumulative nine months of financial year ended 2019 (9MFY19) net profit came in below our expectations at 67.7% of our full-year estimate.

 
It was only within consensus estimates at 71.6%. The variance was due to our underestimation of the weakness of income from its insurance divisions.

Hong Leong Bank Bhd’s (HLB) profit before tax (PBT) in 9MFY19 was flattish with a decline of 0.9% year-on-year (y-o-y) to RM2.03 billion. Main contributor for the decline was the weakness in income which was moderated by write-backs in loan provisions.

Income fell 2.9% y-o-y dragged down by both lower net interest income (NII) and non-interest income (NOII). HLB’s NII fell 2.8% y-o-y due mainly to net interest margin (NIM) compression of -14 basis points y-o-y.

The NIM compression stemmed from deposits competition which led to higher cost of funds. As for NOII, it fell 3% y-o-y. The contraction was due to lower trading and investment gains which fell 42.8% y-o-y to RM259 million.

Gross loans as at third quarter (3QFY19) trended higher, expanding 6.5% y-o-y to RM133.6 billion, versus +4.8% y-o-y and +4% y-o-y as at 2QFY19 and 1QFY19 respectively. It was driven by the +9.4% y-o-y to RM66 billion in residential mortgages and +8.1% y-o-y to RM20.9 billion in SME loans.

Meanwhile, deposits grew 5.7% y-o-y to RM163 billion. It was not surprising that NIM came under pressure as the growth was led by fixed deposits (FD). As at 3QFY19, FD grew 5.1% y-o-y to RM92 billion, whereas current account and savings account declined 3.6% y-o-y to RM39.6 billion.

Insurance division earnings posted a PBT decline of 7.8% y-o-y to RM186.5 million. This was due to lower premiums and weak market sentiments. Share of profit from associated company also came in lower.

This was mitigated by higher revenue, lower provisions on financial investments and higher life fund surplus. In addition, its management expense ratio was 6.3% in 9MFY19, which is among the lowest in the industry.

The Investment Banking PBT under Hong Leong Capital saw 9MFY19 PBT reversing its growth to decline 3.6% y-o-y to RM56 million, from 0.3% y-o-y to RM37.5 million in first half (1HFY19).

This was mainly due to lower contribution from the investment banking and stockbroking divisions as market sentiment was weak in 3QFY19.

We are revising downwards our FY19 and FY20 earnings estimates by 8.3% and 9.4% respectively to take into account the weak 3QFY19 performance.

We believe that HLB continues to drive the group’s performance. Therefore, any weakness in HLB’s performance will have a large impact on the group’s earnings. Furthermore, its other divisions were not able to give significant support.

Therefore, with an absence of a catalyst, we are maintaining our “neutral” call. Besides revising our earnings forecast, we are also revising our TP to RM19.50 (from RM20.10) based on sum-of-the-parts valuation. — MIDF Research, May 29