• Results
• Results in line… Affin posted 2Q17 earnings of RM153.5m (+24.6% YoY, +11.7% QoQ), bringing 1H17 net profit to RM276.7m (+9.4%YoY), in line with HLIB and consensus at 49.3% and 50.5% respectively.

Deviations

• None.

Dividend

• None.

Highlights

• QoQ… 2Q17 net profit surged by +24.6% to RM153.5m. Higher NOII and NII by +34.8% and +4% was offset by a spike in loan-loss-provision (LLP) to RM36m (+521%) and opex to RM351.7m (+7%).
• YoY… 2Q17 net profit advanced by +11.7% mainly due to a surge in NOII by +58%, but was partially offset by a rise in LLP to RM35m and opex to RM351.7m (+22.4%.)
• 1H17… Net profit accelerated by +9.4% YoY to RM276.7m, mainly underpinned by the rise in NII and NOII to RM617m (+7.7% YoY) and RM451m (+49.4% YoY) while opex rose by +21.5%YoY.
• Loans… Loans grew by +5%YoY as healthy growth in residential and working capital was partially offset by slower expansion in personnel use (+2% YoY) and purchase of securities (+18% YoY).
• Deposits… Deposits soared by +9.9% YoY as 23% YoY growth in CASA was negated by a -29% drop in NID. Nevertheless, CASA dropped -1.5% QoQ, leading to lower CASA composition of total deposits of 17.9% (-6bps QoQ). NIM widened by 3bps to 1.91% QoQ, driven by better yielding assets.
• Asset quality… Absolute NPL advanced by +4.8% QoQ reinforced by weakness in construction (+78% QoQ) and non-residential (+249% QoQ), leading GIL to rise to 2.07% (+8bps QoQ). The LLC ratio fell to a low of 36.8% (1Q17: 38.4%). Credit cost spiked to 32bps due to higher GP allowance of -RM23m. However, we are of the view that Affin will be able to achieve 15bps credit cost, aided by continuous recovery effort.

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 based on i) ROE of 6.4x ii) 7.9% WACC.

Source: Hong Leong Investment Bank Research - 5 Sep 2017