Results

• In line with expectations. Reported 3Q17 net profit of RM129.7m (-4.4% YoY, -3.7% QoQ), bringing 9M17 net profit to RM394.7m(+0.6% YoY). This is in line with HLIB and consensus estimates, accounting for 73% and 72.6% of full year forecast respectively.

Deviations

• None.

Dividend

• No dividend declared during the quarter.

Highlights

• FY17 target. AFG missed some key targets namely loan growth (+1.6% YoY vs. mid-to-high single digit) and net credit cost (68bps in 9M17 vs. 25-30bps).
• 3Q17. Net profit of RM129.7m (-4.4% YoY, -3.7% QoQ) derailed by LLP of RM32.4m, chiefly from CA impairment of RM29.8m. NII during the quarter of RM293m was driven by higher NIM of 2.31%. On the flip side, NOII was at RM85.4m (+1.8% YoY, -6.9% QoQ) due to lower fee income, however it was negated by higher forex income.
• 9M17. Net profit was flat at RM394.7m (+0.6% YoY), driven by higher NII (+4.4% YoY) but offset by higher loan-loss- provision of RM67.4m (+57.5% YoY). NII was driven by higher NIM of 2.25% despite lower loan growth of 1.6% YoY.
• Other indicators. Credit cost surged to 68bps in 9M17 (31bps annualized) below 25-30bps FY17 guidance due to higher impairment allowance on loans. AFG remained discipline in cost-to-income ratio (CIR) with positive JAWS of 2.4% recorded, resulting in lower CIR of 46.3% in 9M17.
• Loan growth softened to 1.6% YoY in 9M17 due to a decline in lower risk adjusted return (RAR) loans of -1.4% YoY. However, higher RAR loans remained impressive rising by 14.6% YoY. Management painted that loan activity is expected to pick up with new initiative of Loan- Consolidation-Service with initial target of RM100m that will boost both lower and higher RAR loans.
• Deposit growth outpaced industry average at 4.2% YoY, driven by fixed deposits (+13.5%). However, CASA composition declined to 33.7% as compared to 35% in 9M16.
• Overall GIL ratio remained healthy at 1.0% in 9M17, meanwhile loan coverage was ahead of industry at 137%.

Risks

• The only visible risk to ponder is elevating provision for CA due to loan book expansion.

Forecasts

• Maintained.

Rating

BUY (↔)

• We continue to like AFG for its focus on profitable and viable segments of SME. AFG will introduce two initiatives (Loan Consolidation Service and Mobile Foreign Remittance) in near future that will increase its loan book profile and heighten its presence in the SME segment.

Valuation

• Maintain BUY recommendation, with unchanged target price of RM4.20 based on Gordon Growth with ROE of 11% and P/B of 1.1x.

Source: Hong Leong Investment Bank Research - 23 Feb 2017