Highlights

• Company visit. We met up with AFG’s IR yesterday to seek progress on the latest products introduced during 9M17 results briefing. Overall, we came back feeling neutral on the progress reached so far.

• Gradual progress in latest products… Management shared that there has been gradual progress of its upcoming products namely (i) loan consolidation (ii) mobile remittance. Loan consolidation product that was launched late 2016 is gaining marginal momentum due to its complexity. Launch date of mobile remittance has been deferred to end-April despite overwhelming response from existing clients. To note, AFG spent minimal investment on both products and the investment will not impact FY17 and FY18 CIR.

• … but targeting long-term benefits. Mobile remittance will enable AFG to shore up its CASA further and at the same time beef up fee income. For loan consolidation, AFG will allow customers to consolidate various loans under one account at a better rate of 6.88%. It will also increase low RAR loan that is currently declining due to its low yield in nature.

• Higher investment cost. Quoted from The Edge dated 13 March 2017, AFG’s CEO Joel Kornreich expected AFG to incur significant investment of more than RM150m in FY18 to be invested in technology-based products. Given this, the investment will impact its earnings growth as CIR will surge, and ultimately will lower its ROE. Despite the expenses that will hurt earnings temporarily, we are positive on the investment as it will boost AFG’s competitiveness in the future with varieties of initiatives in the pipeline especially initiatives on SME segment.

• Decline in ROE. We understand that FY18 ROE will take a hit from high investment amid slower earnings growth. Management is eyeing FY18 ROE at 10% vs our estimate of 11%. Nevertheless, at 10%, it is still one of the best in the industry behind Public Bank.

• High CIR. With the potential high expenses, we expect CIR to touch 49% in FY18, offsetting the earning growth at 4%- 5% annually. CIR could even hit 51% should management decide to push investments higher.

Risks

• Somber reception on new products launched and additional investment to fine-tune business.

Forecasts

• We lower our earnings by 28% and 25% in FY18 and FY19 respectively due to higher investment cost incurred.

Rating

• HOLD

• While we reckon AFG’s efforts in the SME segment through new products, higher investment cost in FY18 will jeopardize ROE target. Downgrade to HOLD due to recent share price rally (YTD: +11%%).

Valuation

• We raise our TP on AFG to RM4.30 (from RM4.20) as we re-jig our valuation parameters (higher P/B of 1.2x but lower ROE of 10%). We downgrade to HOLD .

Source: Hong Leong Investment Bank Research - 31 Mar 2017