Sustained by niche segments

AFG’s 1HFY17 core net profit of RM265m was largely in line with our and consensus expectations. The more robust expansion in higher risk-adjusted-return (RAR) loans continued to yield positive results on fund-based income growth and support NIM. We maintain our FY17-19 forecasts and our HOLD rating. PT unchanged at RM4.10. An interim dividend of 8.5 sen was proposed (2Q16: 8.0 sen)

1HFY17 net profit up 3.3% yoy; key driver is higher RAR loan growth

AFG’s 1HFY17 net profit of RM265.1m was 3.3% higher yoy and was in line with our and consensus expectations, with no surprises. The 1HFY17 pre-provision operating profit (PPOP) was up 2.7% yoy against marginal 0.9% yoy growth in 1HFY17 operating expenses, while net income grew by 1.9% yoy (fund-based income +4% yoy; non-interest income -4.9% yoy). AFG’s management remained focused on increasing the portfolio of higher RAR loans (such as SMEs, commercial and personal loans, and credit card loans), which saw a 13.8% annualized growth rate, while the growth of the lower RAR loan portfolio (mortgages, auto-financing and corporate loans) has been flat. As a result of this move, the higher-return loans have shored up gross yields (up till Jun-16) and continued to support NIM (even after the OPR cut), which remained steady qoq at 2.22% (2QFY17) and was up 5bps versus 2.17% in 1HFY16. The 1HFY17 impaired loan allowances were lower by 3.9% yoy, and net credit cost was relatively contained at 17.9bps (1HFY16: 12.8bps).

Niche market remains intact despite weaker industry outlook

Despite a challenging industry outlook, where we are seeing an overall moderation in industry loan growth (ytd Sept-16 at 2.7%), we believe that a smallish player such as AFG will still be able to maintain its profitability given its targeted approach with mass affluent consumers and SMEs, boosting CASA growth and which has seen good traction in growing client fee-based income (in wealth management, FX sales, trade fees and banking services), which grew by 14.8% yoy as at 1HFY17 to RM154.6m (flat qoq).

Maintain HOLD and price target of RM4.10

We maintain our HOLD rating with our 12-month Price Target unchanged at RM4.10, based on a 1.2x CY17E P/BV multiple, derived from a next-12- month ROE forecast of 10.6%. Management remains focused on initiatives to enhance asset growth, strengthen risk management, streamline key processes as well as optimizing funding mix. Downside risks – increase in allowances and erosion in capital buffers with the adoption of the FRS 9 accounting standard. Upside risks – more robust fee-income growth.

Source: Affin Hwang Research - 30 Nov 2016