Highlights/ Comments

• Host briefing. We attended Affin’s post-results briefing yesterday. To recap, Affin’s FY16 net profit of RM571m surpassed expectations. Overall, we walked away feeling neutral as we opine that Affinity programs undertaken will take longer gestation period to translate into earnings accretion.

• Loans. Management explained that the flattish loans growth of only 1.7% YoY was due to RM1.6bn loans were replaced with higher yield loans. These loans had surpassed the hurdle rate of 25-30bps capped by the Group. The higher yield loans are consumer, business and SME segments that carried higher yield in nature. Including the RM1.6bn loans, Affin’s loans expanded by 5% YoY. For FY17, Affin is eyeing 8% YoY loans growth, to be driven by higher yield loans mentioned above.

• Credit cost. Management guided higher credit cost assumption in FY17 to 15-20bps, driven from its continuous assessment on loan growth. That said, we expect LLP to trend higher to around ~RM90m in FY17. In addition, we perceive that loan-loan-coverage will stay benign at around 55%-60% (significantly below industry standard) as management cited reason of fully collateralized loans. Against this backdrop, another round of uptick in impaired loans may hit them given thinner LLC.

• Proposed restructuring. Affin submitted the relevant applications to BNM in 20 Feb 2017 and the proposed reorganization is expected to conclude by end of 2017. While hesitant to share the monetary accretion from the reorganization, management shared its primary objective to tackle the complicated banking issue and to be more efficient in structure.

• Affinity. Affinity program is expected to conclude in 2019 and the program designed to transform the whole Affin Group in doing the business. From 32 initiatives, 18 projects have been launched and the balance will be implemented from now to 2019.

Risks

• Unexpected jump in impaired loans and declining loan growth. Intense competition from bigger players.

Forecasts

• We maintain our forecast post briefing.

Rating

HOLD ( ↔ )

• We are keeping our eyes on Affin’s weak asset quality amid moderation in the loan-loss-coverage. Despite a boost in earnings mainly from lower credit cost, higher cost-to income ratio would drag its overall performance.

Valuation

• Maintain HOLD recommendation with unchanged TP at RM2.45. Our TP is derived from ROE of 5.9x ROE and 7.6% WACC.

Source: Hong Leong Investment Bank Research - 2 Mar 2017