AFG reported a decent 1QFY18 pre-provision operating profit (PPOP) growth (+8% yoy), though the net profit of RM135m grew by only 1.9% yoy. Results were within our and market expectation. As AFG is in the midst of rolling out its transformation initiatives amounting to RM90m in FY18E (whereby RM2.2m has been spent), earnings in the coming quarters may see a contraction vis-à-vis 1QFY18 as opex gradually creeps up. Key initiatives ‘Alliance@Work’ and ‘Alliance One Account’ have been gaining traction - the higher risk-adjusted-returns loan portfolio is up by 11.3% yoy. Maintain BUY, PT at RM4.70.

Marginal Growth in 1QFY18 Net Profit Has Been Within Expectations

AFG’s 1QFY18 net profit of RM135m (+1.9% yoy, 15+% qoq) was within Affin and market expectations. The stronger growth in PPOP (+7.9% yoy, +13% qoq) was mitigated by slightly elevated overhead expenses (+4.4% yoy, -2.6% qoq) and an increase in impaired loan allowances (+66.5% yoy, +9.4% qoq) with an annualized credit cost at 30.9bps (within management’s guidance of 30-35bps). Otherwise, fund-based income (+5.7% yoy) and non-interest income (+8.1% yoy, driven by stronger feebased income) remained the key operating income drivers.

New Loan Initiatives Gaining Traction

New loan initiatives ‘Alliance One Account’ and ‘Alliance@Work’ have been gaining traction – AFG’s higher risk-adjusted-returns (RAR) loan portfolio increased by 11.3% yoy while the lower RAR loans were down 3% yoy. This resulted in the overall group loan growth at 6.9% yoy. Given the improved loan mix (with a slightly higher RAR composition at 32% of loanbook vs. 29% last year), AFG’s 1QFY18 NIM came in at 2.32% (+2bps qoq and +10bps yoy. Response for the Alliance One Account (a loanconsolidation service for consumers), has gathered strong sales acceptance of more than RM300m vs. the management’s expectation of RM50-100m in loans. The Mobile Foreign Remittance application has thus far attracted >2,400 employees to sign up, which will translate into more fee income and forex gains.

Maintain BUY and Price Target of RM4.70; Forecasts Unchanged

We Maintain Our BUY Rating on AFG, With Our 12-month Price Target unchanged at RM4.70, based on a 1.28x CY18E P/BV multiple, underpinned by a CY18E ROE of 9.7% and a 8.7% cost of equity. We expect NIM at 2.2-2.24% and loan growth at 5-6% yoy in FY18-20E. Risks – NIM compression, deterioration in asset quality.

Source: Affin Hwang Research - 30 Aug 2017