Period    3Q13/9M13

Actual vs.  Expectations  The 9M13 PAT of RM399.2m was within the consensus forecast (76%) and that of ours (76%). 

Dividends   No dividend was announced.

Key Result Highlights   The 3Q13 net interest income of RM178.5m shrunk 6.4% QoQ on lower NIM despite a 2.1% growth in the gross loans and a higher leverage with an increased L/D ratio. As at end-Sep12, the total gross loans stood at RM27.2b (+2.1% QoQ; +12.4% YoY), which is above our full-year loan growth forecast of 11%. Total deposits declined 0.7% QoQ to RM34.8b, resulting in a higher loan/deposit ratio of 85.3% (vs. 2Q13: 81.3%). NIM was 10bps lower in the quarter to 1.90% in 3Q13 vs. 2.0% in 2Q13, shrinking the net interest income.  

 The 3Q13 non-interest income of RM141.3m saw a drop of 4.7% QoQ due to smaller treasury gains.

 Post-MFRS139, the gross impaired loans stood at RM572.7m with the gross impaired ratio improving to 2.1% (from 2Q13's 2.3%). The RM12.9m write-back in provisioning was due to bad debt recoveries. The loan loss coverage meanwhile was at 83.8%. 

 Meanwhile, the cost expense was higher with a cost-toincome ratio of 47.6% (vs. 2Q13's 45.5%) as compared with our estimate of 44%.

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

 However, the immediate challenge is that continuous competitions 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 contributed to its lower asset yields and rising funding cost.  

 In addition, AFG's earnings are likely to be unexciting and we expect another major leg up in its fee income to likely happen only in FY14/15 and hence, its cost-toincome ratio may not decline as fast as earlier expected. We expect earnings growth to be only at a mid-to-high single digit range over the next two years.

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

Rating     MAINTAIN  MARKET PERFORM

 Given our unexciting earnings expectations (EPS growth of 8.2% for FY13 and 5.3% for FY14), AFG's current headline ROE of 12.9% appears justified to command only a fair 1.4x P/BV valuation (which is also our targeted multiple). 

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

Risks   There could be more of an upside risk than the downside as the stock could potentially trade up to 1.8x-2.0x PBV (or RM4.80-RM5.30) in view of its potential M&As, which would be at a +2SD level above the mean PBV.  

Source: Kenanga