Affin 1HFY18 net profit of RM224m (-18.7% YoY) came in line with our expectations at 44.5%, but missed consensus at 42.7%. The subdued results was attributed to (i) lower operating profit due to lower NII and lower net gains on financial instruments (ii) higher loan-loss-allowance. Loan advanced at a faster pace of 5.5% YoY as compared to 3% YoY in 1Q18 attributed to the loan in consumer segment, rising by 6% YoY. Deposits growth slowed down to 3% YoY (6% YoY in 1QFY18), caused by CASA deposits by -6% YoY. Gross impaired loan weakened for 2 consecutive quarters, declining to 2.81%. No change to our TP of RM2.60, maintained HOLD with GGM of (i) COE of 10.2x, and (ii) WACC 8.5%.

1H18 results in line. For like to like comparison, we are comparing Affin results to its former holding company, Affin Holdings (AHB). As expected, Affin delivered subdued 2QFY18 net profit at only RM79m (-48.5% YoY). Nevertheless 1HFY18 net profit of RM224m (-18.7% YoY) came in line with our expectations at 44.5%, but slightly missed consensus at 42.7%. The subdued results was attributed to (i) lower operating profit due to lower NII and lower net gains on financial instruments (ii) higher loan-loss allowance.

Dividend. No dividend was declared during the quarter.

QoQ. QoQ is a fair comparison in term of reporting numbers, as Affin posted second consecutive quarter results under the new structure. Net profit declined by 55.1%, caused by the acceleration in the loan-loss-allowance to -RM91.9m (+156%). In addition, the subdued net profit was attributed to the decline in operating income, on the back of slower NII and flat NOII. Loan-loss-allowance was stemmed by MFRS9 implementation, of which, the festival seasons partially contributed to the weakness. Slower NII was caused by decelerating NIM by 2bps to 2.00%, fuelled by higher cost of funds.

YoY. Net profit fell by 48.5% YoY, led primarily by higher loan-loss-allowance to RM91.8m (+155.8% YoY), and lower net gains on financial instruments (-54.2% YoY). Nevertheless, expenses rose at more muted pace of 5.3% which partially offset the overall weakness.

Loan. Loan advanced at a more faster pace of 5.5% YoY as compared to 3% YoY in 1Q18 attributed to the loan in consumer segment, rising by 6% YoY while SME and corporate segment remain weak, decelerating by -7% YoY. In the consumer loan, residential mortgage and personal use advanced stronger by 23.5% YoY and 6.3% YoY respectively. However the weaker working capital loan by -4.7% partially offset the overall growth.

Deposits. Deposits growth slowed down to 3% YoY (6% YoY in 1QFY18), caused by CASA deposits by -6% YoY. The lower CASA growth has led CASA composition declining for 2 consecutive quarters, stood at 16.2% (-17.9% YoY in 2QFY17). Nevertheless, on the back of higher asset yields, (from change of loan mix) NIM widened by 2bps QoQ to 2.00%

Asset quality. Asset quality issue still lingers as gross impaired loan weakened for 2 consecutive quarters, declining to 2.81% vs 2.55% in 1Q18. Weakness was seen in construction, non-residential, hire purchase and working capital loan. 1H18 gross credit cost stood at 22bps vs. 14bps in 1H17.

Forecast. No change to our forecast, as we expect Affin to deliver stronger 2H18 due to tapering loan-loss-allowance in the 2H18.

Maintain HOLD, TP: RM2.60. While we believe Affin progress towards Affinity target is running smoothly, we of the view that progress is capped by its GIL issues and higher fixed rate loan composition. We maintain our HOLD rating on Affin, with unchanged TP of RM2.60, based on GGM of (i) COE of 10.2x, and (ii) WACC 8.5%.

Source: Hong Leong Investment Bank Research - 29 Aug 2018