Highlights

Salient points from analyst briefing yesterday (for its 4QFY13 results which was announced on 26 Feb 13).

On acquisition of Hwang IB, it has already started merger integration process (in terms of system, policy, procedures and processes) and in the midst of mapping strategy for the enlarge IB entity. Expected financial closure is mid-end Apr 2014 which would be followed by the planned RM1.25bn (RM1bn for the acquisition and the balance for future growth) rights issue. The acquisition and the subsequent rights issue are not expected to have any material impact on its capital ratios.

Since it is still early days of integration, will only provide guidance on potential synergy benefits in Apr/May but it believes that there are huge potential given minimum overlapping in terms of client base and branch network and with the intention of growing its presence outside of Klang Valley (where Affin has low representative while Hwang is strong in Penang).

It is targeting 8-10% loans growth given the cautious view on non-landed and commercial properties. However, there are no signs of asset quality stress while HP book is healthy with 0.76% impaired loans ratio while only 4-5% of the loans are 2-3 months in arrears.

The proposed regulatory changes to Islamic banking have little impact as it is tracking in line with transition adoption.

On the green light to commence negotiation for a 24% stake in Bank Panin Syariah, it is still premature to reveal any details but it does shows the group’s intention to enter into Indonesia, after the failed attempt on Bank Ina Perdana. Note that this is a relatively small target as the 24% stake works out to RM76.8m market capitalization.

Risks

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

Forecasts

Unchanged.

Rating

HOLD 

Positives

Improving asset quality and profitability; CET1 equal to Tier-1; and Potential M&A excitement as it is one of the two remaining smallest banks with assets size of circa RM60bn (less than half of the next largest bank, AMMB).

Negatives:

Investors’ perception and delinquency track record as well as one of the lowest NIM, ROE and deposit franchise (CASA only 21% of total) but highest percentage of fixed rate loans among peers.

Valuation

Target price maintained at RM4.26 based on Gordon Growth with ROE at 10% andWACC at 10.8% vs. RM4.10.

Source: Hong Leong Investment Bank Research - 4 Mar 2014