News

It has entered into a Bancassurance agreement with Manulife Insurance. The 10-year agreement will allow AFG to sell, market and distribute life insurance products developed by Manulife.

Manulife will pay RM70m to AFG over the duration of the agreement.

Financial impact

The payment from Manulife will only add circa 1% to AFG’s earnings. While fee from selling the life insurance products will benefit the bottom line, it will take some time before it achieve critical mass and hence, make any impact on earnings. Moreover, it will incur some initial costs (staff training) before the company can comfortably market these products to existing clients.

Pros / Cons

We believe the sale of 30% stake in AIA AFG Takaful earlier and this new banca tie-up is inter-related from a strategic standpoint given that the latter would take less time to contribute and easier to execute. As the life insurance/takaful industry is dominated by large entities which have much larger scale, a minority stake in a new start-up would have at least a 4-5 years gestation period.

This is in line with the group strategy of focusing on transactional banking as well as wealth and cash management (on top of the normal loans expansion).

Risks

Unexpected jump in impaired loans and lower than expected loan growth. Intense competition from much bigger players.

Forecasts

No changes for now.

Rating

HOLD

Positives – strong asset quality and deposit franchise (the latter helps in protecting NIM), strong niche in consumer and SME, potential M&A excitement and ample room for more active capital management. Transformation has resulted in strong loans growth (which used to be lagging is now ahead of industry average).

Stiff competition from significantly larger players with bigger scale and reach as well as relatively lower liquidity against peers.

Valuation

Target price maintained at RM4.91 based on Gordon Growth with ROE of 13.4% and WACC of 10.1%.

Source:Hong Leong Investment Bank Research - 14 Jun 2013