Highlights

• Post-results briefing… Affin organized a conference call yesterday to discuss its recently released results as well as the direction of the group moving forward.
• 3Q17 was impacted by opex… Affin cited higher opex as the key variation in under-delivery of consensus forecast. The increase in opex was primarily driven by personnel and promotion and marketing related-expenses. Specifically, Affin suffered a one-off VSS cost amounting to RM48m in 3Q17 alone as the Group laid-off nearly 300 people under this scheme; almost half from the retrenched staff will be replaced by lower salaried workers. For its marketing related expenses, the better performance of Affin Hwang in the brokerage and asset management has led Affin to earmark huge sum of proceeds as a windfalls.
• Possibility to book expenses under COGS… Affin is currently in talk with auditor on a possibility to transfer Affin- Hwang related expenses under COGS, a standard practice for the banking industry. If Affin manages to transfer these cost under COGS, we may witness a significant reduction in CIR moving forward as better market performance will force Affin to continue set aside with huge proceeds as a commission. That said, Affin is eyeing to record positive JAWS in FY18, where income growth is expected to outpace expenses growth.
• GIL weak due to R&R accounts… YTD, absolute NPL rose by +32.4%, causing GIL to weaken from 1.67% to 2.16%. Out of RM976.7m GIL, 32.6% was contributed by R&R and the balance was impaired. Management is positive that bulk of the R&R will be performing by year end, and thus GIL would improve significantly. The bulk of the R&R was attributed to the real estate which is fully secured.
• Decent corporate loans… While peers suffered in this segment in the quarter under review, Affin progressed well in the corporate loan, boosted by acquisition-related loans and the issuance of world first green sukuk amounting to RM250m.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD (↔)

• Despite making progress towards the Affinity target, Affin is yet to deliver stable earnings with various issues dampened its progress. We view that Affin completion of reorganization process will assist its share price movement moving forward.

Valuation

• Maintain our TP at 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 - 05 Dec 2017