Hong Leong Financial Group Bhd (HLFG) walked away with The Edge Billion Ringgit Club (BRC) award for the highest growth in profit after tax over three years in the financial services category — RM10 billion and above market capitalisation — for the second consecutive year.

Controlled by prominent banking and property tycoon Tan Sri Quek Leng Chan, HLFG’s three core businesses are commercial and Islamic banking under Hong Leong Bank Bhd (HLB), insurance and takaful under HLA Holdings Sdn Bhd, and investment banking and asset management under Hong Leong Capital Bhd.

Quek, 81, is the country’s second richest man with a net worth of about US$10 billion, according to Forbes’ Malaysia’s 50 Richest list.

During the period in review (between FY2018 and FY2021 ended June 30), HLFG achieved a risk-weighted three-year compound annual growth rate (CAGR) of 5.9% in profit after tax — the highest among its big-cap peers in the financial services sector, although lower than its CAGR of 7.2% between FY2017 and FY2020, for which the group won its maiden BRC award last year.

HLFG’s net profit grew a marginal 0.6% year on year from RM1.91 billion in FY2018 to RM1.92 billion in FY2019. After an earnings contraction of 3% to RM1.86 billion in FY2020 — partly due to the effect of lower interest rates amid the Covid-19 pandemic — the group staged a strong profit growth of 22% to RM2.27 billion in FY2021.

It is worth noting that HLFG’s net profit increased another 8% to RM2.45 billion in FY2022. It will be interesting to see if the financial services holding company can go on to win the BRC award again next year.

During the period in review, HLFG’s book value per share increased from RM15.55 as at June 30, 2018, to RM20.13 as at June 30, 2021.

HLFG’s return on equity (ROE) declined from 11.1% in FY2018 to 10.4% in FY2019 before dropping further to 9.3% in FY2020. The ratio, however, improved to about 10.4% in FY2021 and FY2022.

In the group’s FY2022 annual report, HLFG chairman Quek highlights that the numerous global macroeconomic headwinds and geopolitical tensions that remain at play are posing a threat to the currently fragile post-pandemic economic recovery.

The billionaire observes that the surging inflationary pressures, the effects of a strong US dollar on emerging markets and the risk of a recession in major economies will likely weigh on the outlook for the global economy.

“Looking ahead, we are cognisant that the growth outlook is troubled by uncertainties and the path to full economic recovery may be uneven. While we expect Malaysia’s economy to remain resilient supported by firm domestic demand, improvement in the labour market and robust external trade performance seen in the first half of 2022, Malaysia’s open and trade-reliant economy remains susceptible to global external shocks, especially if this involves the country’s major trading partners,” he writes.

Against this backdrop, Quek stresses that HLFG will be vigilant in managing its key business risks. “The group’s balance sheet and risk metrics remain resilient, supported by solid asset quality and we have adequate capital and liquidity to support our future business needs,” he elaborates.

Quek also says the diversified financial group’s consolidated capital position is “comfortably above regulatory limits” with a Common Equity Tier 1 ratio of 11.8% and a total capital ratio of 15.9%.

“Prudent cost management remained a priority with increasing inflationary pressures on our operating cost. We shall judiciously manage our operating cost with targeted investment in talent and digitalisation while maintaining a strong focus on risk management as we enter the new financial year,” he notes.

In a Sept 2 report, Maybank Investment Bank analyst Desmond Ch’ng trims his FY2023-2025 earnings forecast for HLFG by 2% to 5% to reflect the reduced earnings contributions from HLB. He also cut HLFG’s target price to RM23.60, down from RM24.90, and downgraded his recommendation on the stock to “hold”.

Risks to his earnings estimates, target price and rating for HLFG include a slowdown in the domestic economy, which would have a negative impact on HLB’s earnings, as would a pick-up in deposit competition.

“Meanwhile, deterioration in China’s economic outlook, particularly in Sichuan province where (its) 18%-owned Bank of Chengdu is located, would negatively impact associate contributions. 70%-owned HLA’s premium growth is dependent on consumer sentiment while its financial performance would be susceptible to fluctuations in interest rates,” Ch’ng warns in the report, given that just over a fifth of HLB’s earnings is from 18%-owned Bank of Chengdu Co Ltd. The lockdown in Chengdu was lifted on Sept 19.