Hong Leong Financial : Lower earnings from Insurance segment impacted by higher actuarial reserve provisioning BUY

STOCK FOCUS OF THE DAY

Hong Leong Financial : Lower earnings from Insurance segment impacted by higher actuarial reserve provisioning            BUY

We maintain BUY on Hong Leong Financial Group (HLFG) with an unchanged fair value of RM17.60/share based on SOP valuation. HLFG's 1QFY17 net profit of RM386mil (-1.9%QoQ;-0.2%YoY) was within expectations, accounting for 25.6% of ours and 25.2% of consensus estimates for FY17 earnings. The marginal drop in 1QFY17 net profit on YoY basis was contributed by lower earnings for Insurance segment which offset higher earnings from Commercial and Investment Banking. HLFG's 64.4% owned subsidiary, Hong Leong Bank (HLBB) reported a higher pretax profit of RM675mil (+7.9%YoY) underpinned by higher net interest income (NII) of +4.6%YoY and increase in NOII by +11.0%YoY. OPEX of HLBB grew +6.0%YoY from higher personnel and establishment cost. With revenue outpacing OPEX growth, CI ratio for HLBB improved to 44.8% in 1QFY17 compared to 45.2% in 1QFY16. HLBB recorded a stable credit cost of 0.08% in 1QFY17 similar to 1QFY16 while profit contribution from its associate, Bank of Chengdu rose 11.0%YoY in 1QFY17 due to cost management and lower provisions for loan impairment.

A interim dividend of 13 sen/share has been proposed. Our BUY call is premised on current share price of HLFG, which the market continues to value mainly on its 64.4% stake in Hong Leong Bank, a bank with resilient earnings and stable asset quality while undervaluing the other parts of its business in Insurance and Investment Banking. Also, the potential rise in US Fed Rate is expected to result in outflow of liquidity from emerging markets consequently leading MGS yield to rise. We see this as positive for higher insurance earnings ahead for the Group from lower provisions for contractual liabilities.

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