Highlights

• Company visit. We met with AFG’s IR recently to obtain updates on the company. Overall, we came back feeling neutral on AFG’s progress despite the possibility of ROE dilution on higher investment cost incurred.
• Progress on new products. Loan consolidation product is gaining strong momentum as AFG managed to rake in RM100m of loans for the first 3 months. If this momentum continues, we can expect earning accretion from loan consolidation to come earlier in FY18 as opposed to guidance of FY19.
• Slower SME momentum. FY18 loan growth was guided at mid-single digit, partly due to the slowdown in the SME segment. However, AFG appears to be undisturbed and continues to uphold its specialist in small and medium scale SME. Moving forward, AFG expects new products launched to ramp up its loan growth especially in the lower RAR loan segment.
• Focus on liquidity. We opine that in general, liquidity is not an critical issue for banks given the ample liquidity in the broad banking system. To note, AFG’s LD ratio is at comfortable level of 87% in FY17 (84.2% in FY16). AFG will include LCR figure in the investor pack starting in 1Q18.
• MFRS9. Implementation is still not finalized despite approaching the due date by end CY2017. Early guidance of 25% upwards revision in collective assessment balance is maintained. AFG may incur higher collective rate of assessment from 0.79% to 1.11%.
• Cost well contained. AFG is likely to experience negative JAWS in FY18 and FY19 due to its heavy investment to launch new products. However, this will be offset by various cost savings initiative that will bring CTI to 49% in FY18.
• NIM. Despite slower loan growth, AFG is expected to maintain positive NIM expansion of circa 3-5bps in FY18 due to focus on higher RAR loans that carry higher yield.
• Preview of 1QFY18 results. We do not expect any major positive surprise for the coming 1QFY18 results. Topline growth is expected to remain muted as business activities slowed during the Ramadan month despite booking RM100m under its loan consolidation, whilst NOII would remain stable in the absence of forex income and net gain from investment securities. Given this, we expect AFG ’s 1QFY18 results to be in line with our forecast.

Risks

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

Forecasts

• Unchanged

Rating

HOLD (↔)

• Judging from initial reception on its new products, we believe AFG will not have any issue in meeting loan growth target, thus the new loan booked will offset the higher investment incurred to introduce these products

Valuation

• We maintain our HOLD rating and TP at RM4.15. Our TP is based on GGM i) ROE of 9% ii) WACC 8.2%.

Source: Hong Leong Investment Bank Research - 21 Aug 2017