Highlights/ Comments

• Hosts briefing. Affin organized conference call post-1Q17 briefing. To recap, Affin’s 1Q17 net profit of RM123.2m (+6.6% YoY, -30.4% QoQ) was broadly in line with expectations but with rising absolute NPL by +21.6% QoQ.
   
• Spike in NPL explained. Management explained that the spike in NPL was caused by one specific real estate account located in Klang Valley worth RM200m that was classified under restructured and rescheduled (R&R). To note, the R&R account is classified under impaired loans despite the account still performing. The R&R loans will be reclassified as non-impaired with provisions written back if the borrowers continue to service the loans timely within these six months. In the case of Affin, the particular R&R account is fully collateralized and does not required additional provision. Excluding this account, Affin’s NPL would have declined by 5.5% QoQ, lowering GIL to 1.54% from 2.0%.

• Higher opex temporary. This is rather a seasonal issue as Affin booked various one-off related costs such as IT and Affinity. For instance, the additional 200 headcounts since last year had spiked its personnel cost. For establishment cost, the change in IT vendor will lead to cost saving for Affin to the amount of RM3.5m/month, translating into RM24.5m for FY17 alone. Management guided that such savings will lead to lower CTI in the region of 58% by end of FY17 from 66.4% currently.

• Steady NIM. Despite higher cost of funds by 40bps YoY, Affin’s NIM accelerated by 13bps to 1.97%. This is chiefly driven by higher loans yield. Recall that Affin had replaced RM1.6bn loans with higher yield loans.
• Loan growth intact. Still eyeing 8% loan growth, which will be driven by both retail and SME segment. Management admitted that it is now playing a catchup game with other banks in the SME segment. Nevertheless, it is making swift progress in attracting SME players to achieve its targeted loan growth.

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 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 - 31 May 2017