The spike in GIL ratio in 1H18 to 2.81% in 1H18 was linked to 2 accounts (related to real estate and O&G sectors), which are expected to be classified as performing loans by end-18 and 1Q19. Management is positive that credit cost will decline in 2H and come in at lower end of its FY18 guidance. The shortfall in corporate loan (arising from uncertainties post GE-14 results) will be mitigated by higher consumer loan. Management is positive that NIM will remain stable at 1.92% in FY18. We cut forecast for FY18-20 by 2%-11%. Maintain HOLD, TP reduced slightly to RM2.55 with GGM of (i) COE of 9%, and (ii) WACC 7.6%.

We attended Affin’s post 2QFY18 results briefing and walked away feeling neutral on its earnings deliverable amid rising funding cost from acceleration in fixed deposits. On a more positive note, concerns on Affin’s asset quality are clearer after details were provided during the briefing.

More clarity on asset quality. To recap, GIL ratio spiked to 2.81% in 1H18 (vs. 2.53% 1H17), with absolute IL increasing by 32% YoY to RM1.18bn. We understand that 90% of the absolute IL was linked to 2 accounts (related to real estate and O&G sectors), which are expected to be classified as performing loans by end-18 and 1Q19.

Escalating credit cost. Although credit cost of 22bps in 1H18 came at the higher end of management’s guidance of 30-40bps for the full-year, management is positive that credit cost will decline in 2H and come in at lower end of its FY18 guidance, underpinned by an account (related to real estate sector mentioned in the above paragraph) that is expected to be reclassified into performing loan by end-18 and intensified recovery efforts.

To rebalance loan composition. Management reiterated that its 6-7% loan growth target in FY18 would be contributed mostly by Islamic financing amid pick up in residential financing. Management highlighted that the shortfall in corporate loan (arising from uncertainties post GE-14 results) will be mitigated by higher consumer loan (which composition is expected to increase to 52% from 50.1% in 1H18) and SME loans (via its digital initiatives). Affin targets to increase its consumer loan composition to 52% vs. 50.1% currently.

Target 10% deposits growth. Despite having achieved a deposit growth of just 3% in 1H18, management is keeping to its deposit growth of 10% for FY18, as it expects a strong pick up in fixed deposits to meet net stable funding ratio (NSFR) requirement of at least 100% (by Jan-19). Nevertheless, we believe such target is being too ambitious amidst ongoing deposit competition and Affin’s low market share.

Eyeing stable NIM. Despite the acceleration in fixed deposits will drive funding cost higher, management appears to be positive that NIM will remain stable at 1.92% in FY18, underpinned by the increase in SME loan composition, which carries higher yield and hence mitigate higher funding cost from fixed deposits.

Digitalization to help loan and deposits growth. Through Affinity transformation, Affin will introduce more programs to expedite the turnaround time for loan originations to loan disbursement. We note that Affin will launch (i) enhanced retail internet banking, (ii) mobile internet banking and (iii) new e-wallet for the consumer segment, and new cash management/transaction banking system for the corporate/SME segment.

Forecast. We cut our forecast for FY18-FY20 net profit forecasts by 2-11%, to account for higher credit cost assumptions, which more than offset higher loan and deposit growth, as well as NOII assumptions.

Maintain HOLD, with lower TP of RM2.55. We deem that Affin progress is capped by the asset quality issue. We believe that once Affin address the asset quality issue, its share price will move upwards, reflecting its earnings. We maintain our HOLD rating on Affin, with slightly lower TP of RM2.55, based on GGM of (i) COE of 9%, and (ii) WACC 7.6%.

Source: Hong Leong Investment Bank Research - 4 Sept 2018