Results

• Results below… Affin reported 3Q17 net profit of RM76.7m which fell by -50.1% QoQ and -45.8% YoY, dragging 9M17 net profit lower to RM353.4m (-10.4% YoY). This made up only 65.4% and 63.7% of HLIB and consensus.

Deviations

• Higher-than-expected opex by +27.4% YoY in 9M17.

Dividend

• None.

Highlights

• QoQ… 3Q17 net profit slipped to RM76.7m (-45.8%) due to lower operating income and higher opex. Operating income was subdued due to lower NOII contribution (-15% to RM220.5m) whilst NII fell marginally to RM312.7m (-0.6%). Opex continued to rise by +13.8% as Affin booked in higher cost for VSS.

• YoY… Net profit fell by -45.8% as the rise in operating income (+13%) was offset by the substantial opex (+38.8%) and LLP (+717%).

• 9M17… Net profit declined to RM353.4m (-10.4%) as high operating income (NII +6.3% YoY, NOII +42.3% YoY) was more than offset by higher opex (+27.4% YoY). NII was attributed to Islamic banking income (+22% YoY) whilst NOII was underpinned by fee based income and net gains from investment of securities.

• Loans… Loan growth was below management target at +4.6% YoY. Affin sustained healthy growth in residential (+15.8% YoY) and working capital (+22% YoY). Weakness was seen in personnel use (+7% YoY).

• Deposits… Deposit expansion tracked loan growth at +4.8% YoY. However, CASA declined by -2% YoY, leading to lower CASA composition of 17% (Jun-17: 17.9%).

• Asset quality… Absolute NPL advanced by +8.9% YoY, fueled by weakness in construction and non-residential and caused a spike in GIL to 2.16% in 3Q17. Credit cost softened to 6bps due to lower GP and aided by recovery.

Risks

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

Forecasts

• We trim our forecast by 3.5% and 2.6% in FY17 and FY18 respectively to impute higher personnel cost due to various Affinity initiatives.

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

• Lower our TP to RM2.70. Our TP is derived from GGM model based on i) COE of 9.5x ii) 8.0% WACC. Maintain HOLD rating.

Source: Hong Leong Investment Bank Research - 4 Dec 2017