Highlights

• Post-results briefing. We attended Affin’s post-results briefing yesterday and walked away feeling neutral although higher targets were set for 2018. We note that yesterday’s briefing heavily discussed on Affin’s reported financial numbers which were not equal to what we collected.

• Variation in the financial numbers. There was a misperception in the reported numbers, as we initially assumed that the plunge in FY17 PAT (by 27% yoy) was due to its weaker performance. Affin explained the decline in PAT was a result of the transfer listing status from Affin Holdings to Affin Bank effective 16 October 2017, making the reported numbers incomparable (as the numbers reported were just 9 months instead of 12 months) During the briefing, management shared that comparable FY17 net profit (Affin Holdings) declined by a smaller magnitude of 7.7% yoy, weighed by higher opex that rose by RM211m yoy.

• Set higher guidance in 2018. Affin introduced aggressive guidance, which includes above industry average loan growth of 6-7%, deposits growth of 10% and ROE of 9%, but conservative gross credit cost at 30-40bps. Loan growth in FY18 will be driven by all segments (namely, consumer, SME and corporate segments). Affin mentioned that SME segment performed well in FY17 and will likely to lend a support for overall loan growth target. For deposits, Affin will aggressively push for SME CASA deposits and consumer CASA that showed strong traction in FY17.

• Asset quality explanation. GIL ratio was weaker at 2.53% and Affin explained that it was impacted by 2 corporate accounts that turned impaired. Excluding these 2 accounts, Affin’s GIL was in line with industry average of 1.46%. Affin is taking proactive approach to monitor these accounts.

• Opex stayed elevated. Affin completed its MSS program in 3Q17 last year, and various cost adjustment (including new hiring cost, investment bank salary and listing expenses) lifted CTI and 60.8%

Risks

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

Forecasts

• We make no changes to our FY18 and FY19 forecast pending more clarity on the Affin Bank adjusted financial numbers. We are unable to derive new forecast given the reported numbers are based on 9 months as opposed to a full set for the year.

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 our TP to RM2.70 based on GGM model based on i) COE of 9.5x ii) 8.0% WACC. Maintain HOLD rating.

Source: Hong Leong Investment Bank Research - 2 Mar 2018