Results

• In line with expectations… 1Q17 net profit of RM123.2m (+6.6% YoY, -30.4% QoQ) was broadly in line with HLIB and consensus expectations, making up for 22.5% and 22% respectively.

Deviations

• None

Dividend

• None

Highlights

• YoY… 1Q17 net profit of RM123.2m (+6.6%YoY) was contributed by both net interest income (NII) and non- interest income (NOII) which advanced by +10.3% YoY and +39.1% YoY respectively. However, the strong topline was dragged by a spike in operating expenses to RM328.6m (+20.5% YoY).. NII was assisted by healthy NIM of 1.97% which was aided by lower cost of funds. NOII was premised by higher fee income and net gains from investment securities by +31.5% YoY and +175% YoY respectively.

• QoQ… Net profit declined by -30.4% QoQ affected mainly by higher overhead expenses (+11.5% QoQ).

• Loans… Loans improved slightly in 1Q17 (+2% QoQ and +1.9% YoY) driven by personnel use (+14% QoQ), purchase of securities (+10% QoQ) and non-residential (+6% QoQ). However, loans to SME segment moderated by -2% QoQ but were well mitigated by expansion in corporate

lending (+10% QoQ).

• Deposits… Deposits slipped by -2.8% QoQ due to softening of NIDs by -29% QoQ, and demand deposits by - 7% QoQ, lowering CASA composition to 18.5% (-20bps). The slippage in deposits resulted in higher LDR of 89.2%

(end-FY16: 84.9%).

• Asset quality… Despite an improvement in 4Q16, absolute NPL rose by +21.6% QoQ and +2.4% YoY, leading to a weaker GIL of 2.0% from 1.7% in 4Q16. This higher NPL was seen in residential (+93% QoQ), construction (+33% QoQ) and transport vehicles (+10% QoQ). Loan loss coverage continued to slide, dipped to 38.4% due to the spike in NPL. We are keeping our 15-20bps credit cost

assumption at this juncture. Risks

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

Forecasts

• Unchanged.

Rating

HOLD (↔)

• We opine that Affin is making progress towards its Affinity target with deliveries in the ROE, loans growth and deposits target. However, Affin’s weak asset quality will remain a drag, especially with the lowest loan-loss coverage in the industry.

Valuation

• Maintain HOLD rating with unchanged TP of RM2.80. Our TP is derived from GGM model emanated from i) ROE of 6.4x ii)7.9% WACC.

Source: Hong Leong Investment Bank Research - 29 May 2017