Highlights

• Company visit. We met up with Affin’s IR yesterday to obtain update on progress of Affinity program and the proposed reorganization. We came back feeling more positive about Affin’s efforts in transforming the bank.

• Engagement with investment community. Post-Affinity launch in Aug16, Affin is now taking a proactive engagement with the investment community, including participating in the corporate day and regular meeting with analyst to manage perception on the bank. Coupled with the recent positive market sentiment, Affin’s share price has surged by 19% YTD.

• Swift progress on Affinity. Since our last meeting, Affin added another 4 programs under Affinity, making total programs initiated to 21, of which 4 of them have been completed. The projects completed include 1) new RM model 2) SME sales organization setup 3) branch-hub management, and 4) solution architecture. The balance of the projects is on track to be launched in the near future.

• Loan growth 6%-7% in FY17. Affin is targeting 6%-7% of loan growth in FY17, higher than industry of 4%-5%. Bulk of this will be driven by both household and SME loans. SME is the segment that Affin is keen to delve further given its higher yield and underserved nature. Moving forward, Affin would like to maintain its loan composition at 46%:54% (consumer:corporate).

• Presence in hire purchase. While some banks held back in the hire purchase segment, Affin expanded its loan for this segment, from RM5bn as at end-Dec 2005 to RM12bn as at end-Dec 2016 (CAGR 8.3%). Despite the enlarged portfolio, impaired loan for this segment stood at below 1%, attributed to careful stance adopted by avoiding higher risk segment such as second-hand car market.

• Reorganization will complete earlier. Affin is targeting early completion of reorganization in 3Q17 vs. end-FY17. The bank is expected to boost its total capital to circa 18% (incl. RM1bn MTN programme) from 17% as at end-Dec 2016.

• Earnings accretion only on FY18. Despite all the positives, we understand that earnings accretion only can be felt as early as FY18 as high investment incurred will offset cost saving initiatives in early stage.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ( ↔ )

• We turn mildly positive on Affin’s progress which will boast its loan growth in the immediate term. However, we are keeping our eyes on Affin’s asset quality as well as weak loan-loss-coverage.

Valuation

• We raise our TP on Affin to RM2.80 (previously RM2.45) based on higher ROE of 6.3% and P/B 0.6x. We maintain our HOLD rating on Affin.

Source: Hong Leong Investment Bank Research - 29 Mar 2017