Period     1Q14/13M14

Actual vs.  Expectations   The reported net profit of RM137.8m accounted for 25% of our forecast (RM550m) and 24% of consensus estimate (RM578m). Hence, this set of results is pretty much within expectations. 

Dividends    Declared a 7.5sen single-tier first interim DPS in contrast to 6.6sen in 1Q13. 

However, this dividend only accounted for 37% of our full-year DPS estimate of 20.1sen. 

Hence, we are revising down our FY14 DPS to 17.5sen (vs. 16.6sen in FY13).

Key Result Highlights    The 1Q13 net interest income of RM184.5m grew 7.6% YoY (or 4.0% QoQ) inline with higher loans growth despite further margin squeeze. Total gross loans grew 11.5% YoY (or 2.1% QoQ) driven by targeted profitable consumer loans (i.e. share and auto financing as well as mortgages). 

As for the continuous margin compression (-10bps from FY13), apart from competitions for (i) deposits (hence higher cost-of-funding) and (ii) loan (hence reduction in pricing), we understand that the NIM was also lower due to repayments of higher-yielding loans such as Co-op loans (-53% YoY or -32% QoQ to RM477.0m).

Gross loan-to-deposit ratio has improved to 81% vs. 78% in 4Q13 (but was slightly lower as opposed to 82% in 1Q13).

Non-interest income continued to grow strong at 53% YoY (or 14% QoQ) driven by transaction banking, wealth management, treasury activities and a one-off non-recurring bancassurance fee of RM13.5m. Recall that AFG has signed a bancassurance arrangement with Manulife on 13 June 2013. Excluding this, the growth rate would have lowered to 24% YoY and -7% QoQ.

Cost-to-income ratio remained flat at 48.0% (vs. 4Q12: 48.4% & 1Q13: 50.5%).

Annualised credit charge/ratio was up slightly to 8bps vs. 6bps in 4Q13 and net write-back in 1Q13. In the previous quarters (both 4Q13 & 1Q13), we observed that lower loan loss provisions and write-backs in business segment.

Due to a slight increase of effective taxation of 25.1% vs. 22.1% in 4Q13, net profit declined marginally by 0.7% to RM137.8m. However, it still grew 10.6% YoY.

Annnualised ROE was registered at 13.5% vs. 13.7% in 4Q13 and 13.0% in 1Q12.

Outlook    Loan book should expand by low-to-mid teens for the financial year. We understand that the Group continues to focus on the afore-mentioned loan segments as well as to drive more growth from the SME segment despite loan from this segment declined 9.2% YoY (or 2.9% QoQ). However, in our forecasts, we only impute 9.4% and 9.1% gross loan  growth assumptions for FY14 and FY15 respectively.

However, margin compression is expected to continue. We looking at 8bps and 6bps decline in NIM for the next 2 years (FY14 & FY15).

Cost-to-income ratio is like to remain flat at 48% for FY14. 

As for credit charge, it is expected that the ratio to normalise around 10-15bps.

Change to Forecasts  All told, we have fine-tuned our FY14 net profit estimates by 5.5%, respectively, to RM580.0m from RM549.9m. We have also introduced FY15 net profit estimate of RM598.6m.

Rating  Maintain MARKET PERFORM despite the earnings upgrade.

This is because the upside seems less exciting at this juncture. It offers <4% in capital gain or ~7% in total return. 

Valuation     While the current FY14 PBV valuation of 1.9x seems on the higher-end of its Fwd PBV Band, its FY14 PER seems reasonable at 14.5x vis-à-vis FBMKLCI’s FY14 PER of ~17.0. 

However, based on a +2SD price multiple valuations, we only value AFG at RM5.60 (from RM4.90 previously). This valuation represents FY14 PER of 15.0x and 2.0x FY14 PBV. 

While it is at the higher end of both Fwd. PER and PBV Bands, we believe this is reasonable as the banking group is always deemed as a M&A candidate due to its relatively smaller size.

Risks    Worse-than-expected growth in loan and fiercer margin squeeze due to keener competitions or regulation changes.

Source: Kenanga