- At our recent company visit, AFG alluded that loans growth for the SME segment (about 21% of total loans book) has picked up modestly compared to the slower levels before the general election.

- However, the growth has yet to touch its high in FY12 of around 14% to 15%. This is because AFG’s SME customers (who are mostly focused on imports and domestic markets) are still generally cautious.

- The slower growth from the business segment may be due to a more cautious stance adopted by SME owners because of currency volatility, perceptions of costlier materials caused by inflation and slower domestic economic growth. This has also likely led to delayed expansion and capex spending plans by the small business owners.

- Otherwise, AFG’s consumer business continued to do well with mortgage loans growth at around 18%. Auto loans growth is also robust given this is a new growth area, albeit from a low base.

- The majority of AFG’s mortgage loans book (in value) may be classified as borrowers with first mortgages. Borrowers with second mortgages are not a significant portion of its total mortgage loan portfolio, while there is only a handful of existing borrowers with a third housing loan or more.

- In terms of fee income, AFG is maintaining its longer-term targeted fee income ratio of 30%. The main focus for growth is still transactional banking fees. It is also unlikely to experience major losses for its securities portfolio.

- Asset quality remains stable with no major signs of stress. Thus may be due to the already cautious stance adopted by business owners, leading to lean inventory levels. AFG is maintaining its targeted credit costs of 15bps for FY14F.

- The main new information from our visit is a more modest business loans growth environment. We maintain HOLD given the limited upgrade potential to our net earnings for now.

Source: AmeSecurities