Highlights

• Loan growth guided lower… Gross loans declined by 1.3% to RM43.2bn (from RM43.7bn in FY15), as Affin exited RM1.6bn worth of loans (which were deemed marginally profitable) and replaced with RM500-600m worth of new loans (which were better priced), hence resulting in NIM expanding to 1.93% in 1H16 (from 1.88% in 1H15). Given the lower loans achieved in 1H16, management revised its loan growth guidance to 3-4% for FY16 (from its earlier guidance of 6-8%).

• CIR to decline in 2H16… CIR increased to 62% in 1H16 from 60.4% in 1H15, mainly on additional cost arising from the implementation of transformation program and salary increments. Moving into 2H16, management expects CIR to decline from 1H16’s level, hence bringing CIR for the fullyear close to FY15’s CIR of 60.2%.

• Potentially higher provisions in 2H16 (vs. 1H16)… as Affin may have to reclassify some accounts into R&R loans (on current weak economic environment). Nevertheless, management guided that credit cost for FY16 will remain low at circa 15bps, as the provisions will be insignificant (albeit higher than 1H16).

• Mulling to raise tier-2 capital by year-end… in order to strengthen its capital position. Management highlighted that the additional capital may not necessarily result in ROE dilution, as higher equity base (arising from such exercise, if it materializes) could be offset by additional earnings derived from the additional capital base.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD

• Negatives - Investors’ perception and delinquency track record, one of the lowest NIM, ROE and deposit franchise (CASA only 21% of total) but highest percentage of fixed rate loans among peers and Short-term drag and dilution from acquisition of Hwang (transaction and integration costs) and the subsequent rights issue to fund the acquisition.

• Positives - Improving asset quality and Tier-1 capital purely equity, acquisition of Hwang enhancing its market share in broking, Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM67bn (circa half of the next largest bank, AMMB).

Valuation

• Target price maintained at RM2.12 based on Gordon Growth with ROE at 5.6% and WACC at 8.3%.

Source: Hong Leong Investment Bank Research - 2 Sep 2016