Period    2Q13/1H13

Actual vs. Expectations   The reported 1H13 net profit of RM310.1m was within expectations, accounting for 50% and 49% of consensus and our FY13 estimates respectively. 

However, the better profitability was driven mainly by writebacks of loan impairment instead of top line growth. For instance, the 2Q13 net profit grew 13.1% YoY (or 5.6% QoQ), while total income grew at a much slower pace of 1.3% YoY (or 2.4% QoQ).

We understand that such writebacks of loan impairment were in line with the improved asset quality as per the Gross Impaired Loans Ratio (2Q13: 2.1%, 1Q13: 2.2% & 2Q12: 2.4%).

Dividends    No dividend was proposed.  

Nonetheless, we still maintain our FY13 DPS estimate of 13.0 sen, representing ~30% payout.

Key Results Highlights   

6M13 vs. 6M12: Net Interest and Total Incomes grew 2.3% and 2.1% YoY, respectively, despite stronger gross loan growth of 8.7%. Slower growth in net interest income was due mainly to compression in NIM by 10bps.  

Operating expenses were flat (+0.1% YoY), hence cost-to-income ratio (“CIR”) declined 9bps to 46.0% from 46.9%.  Boosted by higher writebacks of loan impairment of RM30.7m in 6M13 (vs. RM6.6m in 6M12), operating profit grew substantially by 9.8%. 

However, the overall growth momentum was eroded by a much lower share of results of associate at merely RM5.9m in 6M13 (vs. RM21.3m in 6M12).

Compounded by higher taxation of 26.6% in 6M13 (vs. 25.1% in 6M12), the net profit only grew marginally by 1.1% YoY.

2Q13 vs. 2Q12: On a single quarter YoY basis, the growth of net profit was more significant at 13.1% despite net interest and total incomes growing at mere 1.9% and 1.3% mainly due to writebacks (2Q13: RM17.6m, 2Q12: RM2.4m) despite higher taxation. Operating expenses, on the other hand, remains flat (+0.3% YoY).

2Q13 vs. 1Q13: Against the preceding quarter, we notice sign of strengthening in earnings momentum as net interest and total incomes grew at faster pace at 3.7% and 2.4% QoQ respectively. Gross loans also grew 3.3% QoQ, implying an annualised growth of 13.2% in a single quarter. Coupled with higher writebacks (2Q13: RM17.6m vs. 1Q13: RM13.1m) and flat operating expenses (2Q13: RM173.6m vs. 1Q13: RM172.4m), net profit grew 5.6% QoQ despite higher effective taxation rate of 27.2% (vs. 25.9% in 1Q13).

Other Highlights   The growth prospect of customer deposits is mixed as it only grew 0.9% QoQ (or ~3.5% on an annualised basis) despite registering a 6.5% YoY growth. While the growth momentum is weakening, it is not a major concern as the total loan to deposit ratio (“LDR”) only stood at 83.3%. While it has improved from 81.3% in 1Q13 and  81.6% in 2Q12, we believe it still has ample headroom to go higher, say 90%. Also, we understand that the Group had also registered healthy growth in its consumer segment and increased the ratio of consumer to corporate deposits from 21.9% in 4Q12 to 23.6% in 2Q13. 

Annualised ROE flat at approximately 10.0%% (2Q13: 10.2%, 1Q13: 9.9% & 2Q12: 9.7%).

Capital adequacy is not an issue with Tier 1 and Total Capital ratios of Affin Bank at 11.0% and 12.7%, respectively, in 2Q13 (vs. 1Q13: 11.2% & 13.0% and 2Q12: 10.6% & 13.3%). 

Outlook    We believe the growth of the Group will be mainly driven by net writebacks for the year. However, we notice that its loan loss coverage of 73.7% (1Q13: 70.9% & 2Q12: 68.3%) is still lower than industry average of 99.8% as  at end-June13. As such, this underlying trend of writebacks could be vulnerable if and when (i)  interest rates start rising or (ii) the economy direction turns volatile from extreme external factors. Under such circumstance, the management is confident that the annualised credit charge could still be capped below 10bps. Thus far, we have factored in a total net writebacks of RM44.9m for FY13 but we imputed “zero” credit cost (but no writebacks) in our earnings model for FY14.

We also suspect that such lower-than-industry  loan loss coverage could be due to its large exposure in corporate loans component of the larger lumpy nature of corporate loans of ~31% (exSME) in contrast to a relatively smaller household loan portfolio that only accounted for 41.3% of total loan (vs. industry average of ~50-55%). Besides, the larger exposure in real estate segment of 12.0% of total loan vs. industry average of 5.6% could probably be another reason, as this type of loan is normally well collateralised hence lower coverage is needed.

CIR is expected to be flat at 46% for the next 2 years as we believe the operating expenses are likely to be sticky due to higher marketing and promotion cost arising from more intense competition and higher personnel and establishment costs due to business expansion.

As for the prospect of loans growth, we understand from the management that the loan growth momentum should start to pick up in 2H13, especially in auto financing segment due to pending demand amidst more launches of new car models. Hence, the Group is still targeting to match the industry growth rate of 9%-10%. As such, we have imputed an average loan growth of 10% for the next 2 years.   

Nonetheless, we reckon that the risk of missing this loan growth target is relatively high should the government decide to continue with its subsidy rationalisation plan in 2H13, which could lead to weaker consumer demand and possibly reducing the disposable incomes of consumers who may in turn cause a spike in NPLs. 

As the trend of margin compression is inevitable, we have imputed in a 10bps and 5bps compression in interest earnings yield for FY13E and FY14E.

Change to Forecasts    We have tweaked some of our assumptions in our earnings model based on the above-mentioned factors.

As a result, our FY13 & FY14 earnings estimates are fine-tuned to RM648.7m and RM671.0m vis-à-vis our previous forecasts of RM633.1m and RM676.8m, respectively.

Valuation   While our earnings revision is marginal, we have revised down our Target Price (“TP”) substantially from RM5.20 previously to RM4.60. 

This is because we believe that the earnings growths that have been driven by writebacks could be unsustainable, especially with the sub-industry loan loss coverage. We also believe that the Group may also need a gestation period should the acquisition of assets of HwangDBS Investment Bank materialised.

Our new TP of RM4.60 is based on 1.0x to its FY14e book value or at 10.2x its FY14E EPS of 44.9 sen. These price multiples represent their respective +1SD-level (1-standard deviation above 3-year mean). Note that our previous valuation was 1.1x FY14e PBV, which was benchmarked against the +2SD-level.

Rating   Downgrade to Market Perform as the upside from here is <10% based on our new TP. However, we would review our call on share price corrections.

Risks  (i) Tighter lending rules and slower loan growth, (ii) Keener competitions and hence further margin squeeze; and (iii) sharp turn in NPls hence higher credit charge.

Source: Kenanga