Period  3Q13/9M13

Actual vs. Expectations  The reported 9M13 net profit of RM483.1m (+3.1% YoY) is within expectations, accounting for 78.2% and 74.5% of consensus estimate (RM618.1m) and our forecast (RM648.7m), respectively, despite a flattish total income growth of only 1% YoY. The slightly better profitability (as opposed to total income) was

due to writebacks of loan impairment in the past three quarters.

Dividends  A 15.0 sen dividend was declared which is better than our expected full-year NDPS of 13.5 sen. Judging from its historical track records, we do not expect any dividend payments in the final financial quarter.

Key Results Highlights

9M13 vs. 9M13

 Total income inched up a flat 1% YoY growth, dragged down by a 5.9% YoY decline in non-interest income. Net interest income (+3.6% YoY) and Islamic banking income (+3.4% YoY) were the main earnings driver.

 Total loan grew 8.1% YoY predominantly in the corporate and SME segments, which accounted for 52% of the total loans and grew 10.5%. Other stronger loan growth drivers were hire purchase (+12.8%), non-residential (+15.7%) and residential mortgages (+11.4%) segments. The total loan growth is somewhat in line with our FY13 loan growth of 7.7% but slightly below management guidance of 9%-10%. As expected, NIM dipped 3bps based on our estimate.

 Customer deposits expanded at a slower rate of 7.4% YoY. As such, the Group’s gross Loan-to-Deposit (LD) ratio was stable at 81.6% as at end-Sep 13 compared with 81.1% as at end-Sep 12.

 Cost-wise, cost-to-income (CTI) Ratio remains flat at 45.6% vis-à-vis 45.5% in 9M12.

 As mentioned earlier, the Group recorded RM35.3m writebacks (arising from the removal of the transitional provision on collective evaluation of loan impairment by BNM in 2012) in contrast to RM1.1m allowance of impairment in 9M12 which resulted in operating profit growing by 3.7% YoY.

 However, we are concerned over the sustainability of the trend of writebacks even though the gross impaired loan (GIL) ratio for the Group stood at 2.0% as at end-Sep 13 against 2.4% in end-Sep 12. This is because the impaired loan loss reserve (LLC) only stood at 75.4% (vs. 70.7% in 3Q12) which is lower than the industry average of ~100%.

 At Affin Bank level, the TC and T1C were recorded at 13.5% and 11.8%, respectively (a slight dip from 14.8% and 12.0% in 3Q12).

 The annualised ROE of 10.3% is spot on with our expectations (of 10.3% too).

Other Highlights

3Q13 vs. 2Q13

 Against the preceding quarter, we notice signs of pick-up in earnings momentum with higher total income and net profit QoQ growth rates of 2.7% and 8.6%, respectively.

 We believe NIM has actually improved by a very marginal magnitude of 1bps against 2Q13. We saw net interest income growing 3.3% QoQ but total loans only grew 1.2% QoQ.

 Despite a 1% increase in operating expenses, CTI improved slightly to 44.8% from 45.6% in 2Q13.

 Nonetheless, we saw early sign of normalisation in writebacks of impaired loans. The writebacks were reduced to RM4.6m from RM17.6m (-73.8% QoQ). We believe with a relatively lower LLC ratio vis-à-vis the industry, credit cost could normalise in coming quarters.

 As a result, operating profit actually declined 2% QoQ.

 Nonetheless, a much lower effective tax rate of 22.0% (vs. 27.2% in 2Q13) boosted the net profit growth to 8.6% QoQ.

Outlook  To recap, we believe the growth of the Group will be mainly driven by net writebacks for the year. However, we notice that its LLC of 75.4% is still lower than industry average of ~100% as at end-Sep 13. 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.

 Besides, we also believe 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 ~37% (ex-SME exposure of 16%) in contrast to a relatively smaller household loan portfolio that only accounted for 40% of total loan (vs. industry average of ~50-55%).

 CTI ratio is expected to be flat at 46% for the next two 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 that the loan growth momentum should start to pick up in 2H13, especially in auto financing segment due to pent-up demand amidst more launches of new car models. Hence, the Group is still targeting to match the industry growth rate of 9%-10%. Taking such guidance into consideration, we have conservatively imputed a moderate total loans growth of 7.1% in FY13, but a more aggressive growth of 12.6% in FY, translating into average loan growth of c.10% for the next two 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 and may in turn cause a spike in NPLs.

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

Change to Forecasts All told, we have already factored the above-mentioned assumptions into our financial model in previous quarter; hence we maintain our FY13 and FY14 earnings estimates at RM648.7 and RM671.0m for now.

Valuation  Our Target Price (TP) remains unchanged at RM4.60 (implying 9% upside from here).

 Our TP 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 average mean).

Rating Maintain MARKET PERFORM

Risks to Our Call  (i) Tighter lending rules and slower loan growth, (ii) Keener competitions and hence further margin squeeze, and (iii) sharp turn in the trend of declining NPLs, hence higher credit charges.

Source: Kenanga