Period     2Q13/1H13

Actual vs. Expectations    The 1H13 PAT of RM266.5m was within the consensus' forecast (51%) and that of ours (51%).

Dividends     No dividend was announced.

Key Result Highlights     The 2Q13 net interest income of RM190.7m grew 9.7% QoQ, supported by a 3.0% growth in gross loans and a higher leverage with an increased L/D ratio. As at end-Sep12, the total gross loans stood at RM26.6b (+3.7% QoQ; +13.2% YoY), above our full-year loan growth forecast of 11%. Total deposits grew only 1.2% QoQ to RM35.0b, resulting in a higher loan/deposit ratio of 81.3% (vs. 1Q13: 80.2%). The 2Q13 non-interest income of RM148.3m saw a marginal increase by 1.9% QoQ, driven by treasury gains and trade finance.

Post-MFRS139, the gross impaired loans stood at RM600.3m with the gross impaired ratio improving to 2.3% (from 1Q13's 2.4%). The RM7.1m write-back in provisioning was due to bad debt recoveries. The loan loss coverage meanwhile was at 86.4%.

Meanwhile, the cost expense was lower with a cost-to-income ratio of 45.5% (vs. 1Q13's 50.5% & 2Q12's 45.5%). NIM was higher during the quarter, rising 15bps to 2.0% in 2Q13 vs. 1.85% in 1Q13 due to the increase in the L/D ratio and a broader interest spread.

Outlook     The momentum of its loan growth is sustainable driven by its aim of growing its SME and mortgage loans (targeting high teens). Our loan growth forecast of 11% YoY for AFG is thus highly achievable with the risk actually on the upside.

However, the immediate challenge is that the continuous competition could have a negative impact on its NIM. In fact, management has guided for a potential NIM compression of 10bps as the group's strategy to focus on mortgage and SME loans will see it competing more in these two highly competitive segments, which had contributed to its lower asset yields apart from rising funding cost.

AFG could be well positioned in a slowdown environment, where its credit cost is likely to outperform its peers considering its lower levels of new NPL formation and aggressive provisioning in the past.

Change to Forecasts     We are maintaining our FY13E PAT of RM522.0m and FY14 PAT of RM549.4m.

Rating     MAINTAIN MARKET PERFORM

Given our optimistic earnings expectations (EPS growth of 16.6% for FY12 and 8.2% for FY13), which is in line with management's pro-growth strategies, AFG's current headline ROE of 12.9% appears justified to command a 1.4x P/BV valuation (which is also our targeted multiple).

However, we believe that the share price has already factored in the earnings good growth trend.

Valuation     Maintaining our MARKET PERFORM rating and TP of RM4.00 based on 1.4x FY14E book value of RM2.89.

Risks     We actually see more upside risks than downside as the stock could potentially trade up to 1.8x-2.0x PBV (or RM4.80-RM5.30), inline with the +2SD level above the mean.

Source: Kenanga