Target RM3.70 (Long Term: Under Perform)
The writebacks in loan loss provisioning (LLP) pushed Affin's 1H13 net profit slightly above our expectations, at 54% of our full-year forecast (51% of consensus). However, we think that the 1H13 net writeback of RM30.7m in LLP will not be sustainable in 2H13.
We up our FY13 net profit by 2.3% as we cut our LLP projection by 30%. However, we maintain our DDM-based target price (12.6% COE; 4% long-term growth). It remains an Underperform due to 1) a slowdown in loan growth; 2) an expected upturn in credit costs; and 3) margin compression. We prefer Maybank.
A weak topline growth
The group's 1H13 operating revenue rose only by 2.1%, substantiating our concerns of a weak topline growth. Net interest income expanded by 2.3% as it was impacted by a 9bp yoy contraction in net interest margin. Non-interest income (excluding the Islamic banking income) was flattish at RM192.4m, with a 6-7% yoy increase in fee income and foreign exchange gains.
Slower loan growth
In line with the industry trend, Affin's loan growth eased from 9.6% yoy in Mar 13 to 8.7% yoy in Jun 13 (vs. the industry's 9.1%). This was due to slower expansion of loans for the purchase of big-ticket items, but the contraction in working capital loans narrowed from 5.2% yoy in Mar 13 to 1.6% yoy in Jun 13.
Improving asset quality
The gross impaired loan ratio improved from 2.22% in Mar 13 to 2.09% in Jun 13, while the loan-loss coverage rose from 70.9% to 73.7% over the same period.
Weak topline growth
We advise investors to trim their holdings in Affin as we are still cautious about its earnings prospects, as reflected by the 6.3% drop in our projected FY13 EPS. Earnings risks include weak margins, an upturn in credit costs and a slowdown in loan growth.
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